I would now like to introduce your host, Katrina O'Connell, Vice President of Investor Relations.
Good afternoon, everyone. Welcome to Gap Inc.'s fourth quarter 2013 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 we're 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. 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. I'd like to turn the call over to Glenn.
Thank you, Katrina. Good afternoon, everybody. The February call is traditionally one that is pretty heavily skewed towards financial information. Sabrina will be coming on in a minute to talk about Q4 2013 results, full year results, and to give guidance for 2014. With that as our backdrop, what I want to do is two things. I want to take you through what I believe are the accomplishments that Gap Inc. had in 2013, and then speak to our four global strategic priorities for this current fiscal year. In 2013, we had a number of accomplishments that contributed to our performance of an increase of 18% in earnings per share. Some are more culturally based. The fact that we comped in every quarter, we felt good about. It was a very consistent year.
The numbers had a little bit of variability into them, we comped every single quarter. While the market numbers are not available just yet, we're pretty confident we can say we gained share again for the second year in a row. Gained share, especially in our domestic market of North America. One of the things I feel good about when I think back on 2013 is culturally, the business pivoted towards digital. This business is building a bridge between its physical stores and the digital world in which we operate. We know that's the winning strategy for us. Look, I've been in retail 25 years. I grew up with the bricks-and-mortar side of the business. We have 3,600 stores if you include our franchise business. It takes a company like ours a long time to make that mindset shift. In 2013, we made it.
We made it through some of the exciting investments we've made on the digital side of the business. We've made it through the new team we put into place, that was something so important to the future of our business to get the right balance between our digital and physical messaging to consumers and offerings in those two channels. We launched Reserve In Store and Find In Store in 2013. In 2014, we have to market that strongly and make sure that all customers, especially millennials, are really aware of this service that we have that nobody else has. We also demonstrated in 2013 that we continue to have a very flexible economic model.
We saw that in the fourth quarter, where when the gross margin dollars in our business are not to the level we'd like them, we have the ability through multiple levers in the business to reduce cost and still achieve a very strong performance on operating margin and on earnings per share. I would actually say in 2013, we found new avenues of cost reduction. It was a combination between the flexibility in the model and constantly pushing ourselves to find new savings and new ways to get efficiency and productivity in our business. Our international online business had another very strong year, I mention this for a strategic reason. We continue to look at what the right balance is of our bricks-and-mortar business to our growing digital business internationally to have this growth.
In Europe and Japan and China, there's always going to be a need for a customer to go into a store. Philosophically and strategically, Gap Inc. believes that. Finding the balance in our international markets is going to be important where the fleet's not as large as here domestically. In the China market, we opened over 30 stores, more importantly, we opened in four new cities. We end of the year in 21 cities, which is good coverage for us. I'm sure everybody knows this stat, it's always worth repeating because it's so striking. There are 50 cities in China with more than 5 million people. We're not even halfway there yet. What's important, because most people know we've been making a big investment in marketing and brand awareness.
Long term, that's how you're going to win in China, by having a real brand that people know what it stands for and what it represents. Our awareness in 2013 hit 70%, that's equal to or above a lot of our international competitors who've been there many years before us. 2013 will be remembered as the year that Old Navy went international. While we tested a single store in Tokyo in 2012, we now have almost 20 stores in Japan, that's opening the door because what happens now is we built the structure and we put the processes in place to have an international business. Now you just got to layer on countries, that's a big part of what Stefan put in place.
We are really prepared now in 2014 to take our biggest brand outside of its traditional two markets of the U.S. and Canada. We opened up our 500th global outlet store in 2013. Actually finished at 525 plus, but we opened our 500th store. This is a key tenet to the company strategy, multiple channels. Strong in specialty branded business, complemented by this derivative of our specialty business, which is our value outlet business and our online business. That 500 stores globally, really speaks to the opportunity for us in more international markets to come. Finally, 2013, from the company's perspective, as well as my own, was the breakout year for Athleta. It opened 30 stores. We have 65 stores now.
By every metric we look at, whether that's comp, traffic, penetration in key markets, what the brand stands for, the new customer acquisitions, it was really a breakout year for Athleta. That's something to celebrate in the business that has six brands, three that are iconic, and looks like Athleta is on its path to becoming the fourth iconic brand within Gap Inc.'s portfolio. As we look at 2014 at Gap Inc., we're very focused on our four global strategic priorities. Let me talk about our global growth, and that starts with our international markets. Our international markets start with China. We'll have 30 new stores in the Chinese market, four new cities in 2014. That's made up of both specialty stores and outlet stores. We're looking at making some real investments beyond what we've done the last couple of years in our online business.
We're lining ourself up with some strategic partners. We do see the online market and mobile business. Everything we're doing here domestically is we're seeing it in spades in China, which lines up so nicely with how we see our business and winning both in digital and physical. Old Navy opens up in China. First store opens on March 1st, which is next week, and we will do another five stores on top of that store opens in Shanghai next week in 2014. You have Old Navy International outside of China. We'll open about 25 stores in Japan, and we will go to our first franchise market this year in the Philippines. Our online business will deliver growth to us because day one, when Old Navy China opens, we will open an Old Navy site on that exact same day on March 1st. Same goes for Taiwan.
The Gap Taiwan online will open up the first day our store opens. From a growth perspective, we'll open up 60 global outlets in 2014. Lastly, we will open somewhere around 30 Athleta stores and get just close to the 100-store mark by the end of the year. Second big priority for us is on omni-channel. From my perspective, it starts with marketing and driving awareness of Reserve in Store and Find In Store. As a matter of fact, Reserve in Store will be in all Gap stores. It was only in half the Gap stores at the end of Q4. Domestically, one of the investments we're making, we're making lots of investments. It's always about our site. How can our images look better? How can it be faster? Everything's important to us in online.
One area we're focusing on is on responsive design and making sure regardless of the device you're on, because not all devices are the same, how does the messaging and the images to get to the highest level of engagement possible based on how personalized each person's device is? That's a big investment we're making. One new investment we're making as part of our omni-channel roadmap is to get into order in store. We'll be doing some pilots in the first half of this year, whether that's on a self-service kiosk in our stores or a service component inside, which fits to the announcement we made last week about wages. More and more, our store associates, full-time, part-time, managers, are being asked to do so much more. Lots of opportunity on the omni-channel. Some of the ideas in the U.S. will migrate to Canada.
We're looking at click and collect in the U.K., which is something that's more appropriate in that market than Reserve in Stores in North America. Lastly, you'll see a lot more personalization in our business. We're going to operationalize it in this current fiscal year. That just starts with serving up homepages that matter to people based on their buying decisions historically or trying to make sure that if somebody is more interested in certain categories, certain messaging, that that personalized homepage happens. This business is all about engagement. You're not getting click-through, you're not maximizing engagement. That's what personalization is about. Third strategic priority is to build a responsive supply chain model. 2013, that started with the consolidation of our fabrics, eliminating lots of fabrics we didn't need.
Now that we have a fabric library that's a lot less than it was the previous year, now you can platform those fabrics. We're making huge progress on that. We went from almost having no fabrics platformed, it's going to be a big difference in our business. How much product by the end of the year came off, like fabric that was platformed in the business. It's sitting at the vendor ready to go. It introduces flexibility and speed to an operating model which we didn't have before. VMI, vendor-managed inventory, made big strides in 2013. We're doing a lot more testing of products, test and respond. You'll see a lot of that with what's happening right now in our business for fall. In the back half, we're going to finally introduce rapid response. That's just having a model which you can react in season.
All of those will come together, and we're feeling pretty good with the progress we've made. Lastly, we are working to develop a seamless inventory model at Gap Inc. Responsive supply chain is a change in our supply chain model. This is a change in how we manage inventory. One example is both in China and Athleta. In 2014, we will have inventory sitting on the same shelf that can be shipped to a direct customer, to their home, or to a store. To me, that's the holy grail of seamless inventory, and that's where we really can maximize our gross margin dollars. We'll be hearing a lot more updates about our vision of this for 2015. I do want to inform everybody that we accomplished what we said we're going to accomplish last year. We have a global label now in all of our businesses.
We have global assortment for each one of our brands, and we'll have a global fit by fall. That's the foundational tenets of any seamless inventory model of getting those three components in place. Before I hand the call over to Sabrina to take you through the numbers, the team here in San Francisco and New York, and our offices around the world, feel good about our performance in 2013. It was a good year on top of our performance in 2012. We are very focused at the beginning of this year on winning, on building this bridge between digital and physical, on executing these four global priorities flawlessly, and retaining and attracting the best talent in the industry. With all that said, Sabrina, over to you.
Thank you, Glenn. Good afternoon, everyone. Overall, we're pleased with our performance in 2013. We achieved our stated objectives, namely growing sales, delivering operating margin expansion, growing earnings per share, and returning excess cash to shareholders. We met our goals despite facing significant headwinds from foreign exchange and a shorter fiscal year. Here are some full-year highlights. Net sales grew 5% on a constant currency basis as we continue to gain momentum in growing globally through all of our channels, especially online, which grew 21% for the year. In line with our strategy, our revenue mix shifted to our higher-return channels, with online penetration growing two percentage points to 14%. Full-year comp sales were positive two, driven by Gap at positive three and Old Navy at positive two. Operating margin expanded 90 basis points to 13.3%.
Earnings per share grew 18% to $2.74 on top of last year's strong 49% growth. Finally, we distributed $1.3 billion of cash to shareholders through share repurchases and dividends. Moving to fourth quarter and full-year financial results. As a reminder, both fourth quarter and full-year results are negatively impacted by the loss of the 53rd week. Sales for the fourth quarter were $4.6 billion, with comp sales up 1%. For the full year, reported sales were up 3% to $16.1 billion, despite the negative translation impact from foreign exchange of about $240 million. Moving to gross margin, fourth quarter gross margin was down 280 basis points to 34.8%. Merchandise margins were down 220 basis points for the quarter, driven by the unusually promotional holiday season. As we expected, rent and occupancy deleveraged 60 basis points, driven by the lack of the 53rd week.
For the full year, gross profit dollars grew by 2% to $6.3 billion, and gross margin was down 40 basis points to 39%. Our merchandise margins were down 50 basis points, and rent and occupancy leveraged by 10 basis points. Regarding SG&A, our discipline around expense management resulted in fourth quarter total operating expenses of $1.1 billion, a reduction of $103 million from the prior year, driven by savings in store expenses and overhead, as well as the positive impact to expenses from foreign exchange translation and the lack of a 53rd week. As a percent of sales, total operating expenses leveraged by 140 basis points. For the full year, total operating expenses were $4.1 billion, down $85 million from last year, with the majority of the decline driven by translation of foreign currency. As a rate to sales, SG&A leveraged 130 basis points.
Marketing expenses for the full year were $637 million, down $16 million to last year. The result, we're pleased that we grew full-year operating income by $207 million and net income by $145 million to nearly $1.3 billion. Supporting our long-term growth strategies, we opened 190 new company-operated stores in 2013, with store growth focused primarily in Asia. In North America, store growth was driven by Athleta. Our square footage grew by 1%. Store count and square footage by division are listed in the press release. Capital expenditures for the full year were $670 million. Though over half of our capital expenditures was on stores, importantly, we also continued to invest significantly in strategic areas like omni-channel and supply chain. Regarding the balance sheet and cash flow, inventory dollars per store were up 7% at the end of the fourth quarter, in line with our guidance.
We expect a similar increase in inventory dollars per store at the end of Q1. For the full year, free cash flow was an inflow of over $1 billion, and we ended the year with about $1.5 billion in cash. We distributed $1.3 billion of cash to shareholders through share repurchases and dividends, including $134 million on share repurchases in the fourth quarter. We ended the year with 446 million shares outstanding. Now I'd like to share our outlook for 2014. This year, we'll continue to pursue a balanced approach to deliver on our goals. Specifically, we'll focus on growing sales with healthy merchandise margins, managing our expenses, delivering earnings per share growth, and as always, returning excess cash to shareholders. However, it's important to discuss the impact foreign exchange will have in 2014.
Let's begin with the impact to our goal of growing sales with healthy merchandise margins. Our objective overall is to deliver modest positive comps on a full year basis. In addition to our comp base, we plan to drive increased revenue through our multiple channels, newer brands, and geographies. While comp is reported on a currency-neutral basis, our revenues and margins are subject to currency fluctuations. As a reminder, our largest foreign subsidiaries are in Canada and Japan, with combined sales in these two countries of over $2 billion. With the continuing depreciation of both those currencies, our reported results will be negatively impacted. There are really two separate impacts of foreign exchange. The first is translation, and the second is the economic impact to our merchandise margins.
Because we hedge inventory purchases for our foreign subsidiaries 12-18 months in advance, we were largely shielded from the merchandise margin impact of the depreciating JPY in 2013. However, as the old hedge rates lapse and new, less favorable hedge rates come on, the cost of goods in local currencies will increase for our largest foreign subsidiaries. As a result, though we expect merchandise margins to remain healthy on a constant currency basis, on an actual basis, merchandise margin expansion will be challenging. Further, based on today's spot rates, translation will likely continue to impact us as well. Having now explained this important dynamic to our merchandise margins and revenues, I would now like to turn to EPS growth. We expect reported EPS for fiscal year 2014 to be in the range of $2.90-$2.95.
Our guidance contemplates some of the foreign currency headwinds I just discussed. At today's spot rates, we estimate that the impact from foreign currencies reduces our reported EPS growth rate by 5 full percentage points. To be clear, at its midpoint, our guidance of $2.90-$2.95 represents EPS growth of 7% on a reported basis, which on a constant currency basis would be 5 percentage points higher than that or a solid double-digit growth rate. Driven primarily by the foreign currency impact to our merchandise margin, we expect operating margins to remain flattish on a reported basis. Regarding the balance sheet and cash flow, we remain very committed to our principle of returning excess cash to shareholders. Since the inception of our buyback program in 2004, we have repurchased about 630 million shares, representing over half of our shares outstanding at an average price of under $21.
Over that same period, our free cash flow generation has averaged over $1.1 billion per year. We very consistently distributed that free cash flow to shareholders, with distributions averaging over $1.5 billion per year over the same period. As a reminder, we announced a new $1 billion share repurchase authorization in November. We have $966 million remaining on that authorization. Today, we announced our intention to increase our dividend by 10% to $0.88 per share. This represents an increase to our annual dividend per share of more than 75% in just two years. Here are some additional full-year guidance metrics. Regarding company-operated stores, we plan to open about 185 and close about 70. We expect to increase net square footage in 2014 by about 2.5%, our largest increase since 2007.
We expect capital expenditures to be about $750 million, reflecting continued investment in our strategic goals. We expect depreciation and amortization to be about $520 million. Finally, we expect our full-year effective tax rate to be about 38.5%. In conclusion, we're pleased that we continue to deliver strong financial performance while also making progress against our strategic objectives. As we enter 2014, we remain focused on a balanced approach to achieving our goals and driving further value for our shareholders. Thank you. Now I'll turn it over to Katrina.
Thanks, Sabrina. That concludes our prepared remarks. We'll now open up the call to questions. We'd appreciate limiting your questions to one per person.
Thank you. Our first question comes from Oliver Chen with Citigroup.
Hi, congratulations on a great year. Regarding the guidance going forward and the look forward to the healthy merchandise margin rate, what are the main drivers for you to achieve that in your view, given that we've come off of a mixed and challenging kind of holiday environment and you guys sailed through it with flying colors? If you could spend a little just time talking about your assortment planning and your biggest opportunities there, in terms of what you see in the marketplace and how you're executing by banner. Thank you.
Okay, great. I'll start off, Oliver. I would say that our goal as the year progresses is certainly to bring our inventories even more in line with our total sales growth. That's number one. Number two is in the back half, we should begin to realize some benefits, albeit modest, but we definitely should begin to realize some benefits from our supply chain initiatives that we've been talking about for some time, like fabric platforming, as well as vendor-managed inventory. That together with what we believe will be solid assortments is why we feel that delivering underlying healthy merchandise margins is certainly realistic for us. I'll turn it over to Glenn.
On the assortment planning, I'd say there's two, without going brand by brand, there's two changes. One that applies to Gap and Banana Republic. You'll see our assortment become much more global. This is the balance that the business has to strike. If you're going to have a global label and a global fit, what follows that is more global assortment. The change there is that our local teams will be more involved in buying depth of differentiation as opposed to breadth of assortment. That's a pretty big change for us. It actually, from my perspective, it simplifies the business. It makes it faster, and it provides more continuity across all of our stores at Gap in their 50 odd countries and Banana Republic in close to 30 countries.
The reason I don't mention Old Navy is that Old Navy just added Japan just about 18 months ago, Old Navy started off with a global assortment, global label, and a global fit. The second thing I'd add is that, in order to really get the full value of a responsive supply chain, the assortment mix has to shift somewhat. When we do our assortment mix, what's right for customers, and how do we make sure it supports the brand and what the brand stands for, and how do we gain share. Also the mix can change a little bit towards longer living styles. More styles would last 52 weeks. Now, within that style, you can have a change in color, you can have a change in print, you can even have a small change in the style itself.
In general, using the fabric platforming, more longer living styles, 52-week styles, more styles will last 24 weeks, you'd have a few, percentage-wise, a little less under 12 week or less. These are nuances. We're not talking about 10, 12 percentage point changes, but nuances that fit with the responsive supply chain needs the company has.
Thank you. Best regards.
Thank you. Our next question will come from Lorraine Hutchinson with Bank of America Merrill Lynch.
Hi. Thanks. It's Paul Alexander for Lorraine. Guys, can you just tell us a little bit about how you're thinking about the environment in 2014? As Oliver just said, we're coming off of a very promotional holiday in fall. Do you feel like things are getting better in that regard? Do you think recent weakness in the mall is temporary like that or perhaps something more secular? How does that impact how you're planning inventory and promotions for 2014?
I'd definitely say the mall traffic for a number of years has been slowing down. If that's the definition of secular, then we're definitely preparing for mall traffic to not robustly turn back upwards all of a sudden. Whether it continues to decline somewhat over time, I think that's realistic to assume, and that's part of our thinking of the omnichannel work we're doing. The question for us we don't have just yet, there's early indications, but they're not worth commenting on until we have more and more evidence. We'll, as I said in my opening comment, this notion of getting people's eyeballs, which is greater than 50% of the engagement our brands right now start on a smartphone or an iPad or a desktop. How do you get that customer, getting them into the physical store?
That's that bridge between digital and physical, and Reserve in Store is one of the tools to make that happen. Now, we're only one player in the mall. One set of brands or portfolio brands with one tool called Reserve in Store is not necessarily strong enough to change the overall shift that's going on in frequency of visits or mall traffic. For us personally, we're doing it because we're the category that people at the end of the day, they want to buy it in the store. Absolutely, people buy our category and our brands online. The vast majority, that number really hasn't changed in five years, would prefer to get engaged online and even bring their smartphone into the store so they can get into social media while shopping our store. They want to buy the product.
They want to have the shopping experience inside the store that involves fitting room, service, looking at different choices. This digital bridge of the digital environment in which we continue to invest in our physical stores is critical for us. The promotional environment, I think I kind of answered this the same time for the last five or six years. I mean, the environment's been promotional since 2008. There was promotions in 2007, but it picked up in 2008. Our way of dealing with that is we have a very strong outlet business. We have a very strong brand in Old Navy that are really our value brands.
We got to continue as a business to be innovative and creative and bring reasons for people to engage in our brands, either online or in our stores, that are not rooted in promotions and discounts with the frequency in which they're rooted in today. Sometimes we do that very well. In general, I think that's a huge opportunity for us and one that our brand presidents are very focused on in 2014.
Thank you very much.
Our next question comes from the line of Kimberly Greenberger with Morgan Stanley.
Great. Thanks so much. I'm wondering, Sabrina, you mentioned that you found some, let's say, an unlock and additional SG&A savings opportunities in the back half of the year. Can you just help us understand where this came from? I'm not expecting the same challenges necessarily to persist in the second half of the year here in 2014. If they did, do you have incremental opportunities beyond the SG&A savings that you secured last year? Thanks.
Yeah, sure. Kimberly, for the most part, I think you've seen us pretty consistently show a lot of discipline and flexibility around our expense structure, that's because over 50% of our expenses are store related. Over 50% of that is variable. We know how to sort of flex our expense structure quite nimbly, I'm proud to say. With regard to the end of this year, for the back half in total, of course, we benefited from the lack of the 53rd week. Expenses would naturally, some portion of them would just be down. We also benefited from the translation of expenses from foreign currencies coming in less. We did, in fact, for sure, have old-fashioned discipline around store expenses were a big lever in that, because again, they're largely variable. Secondly, our overheads.
In total, we also experienced quite a bit of good discipline around that. Looking forward into 2014, it is always our goal to remain disciplined and try and leverage expenses. If we achieve our goal, of course, of increasing revenues and delivering modest positive comps, we would expect our expenses to increase on a nominal basis but always leveraged. We'll use many levers within that large expense area in order to deliver that. What I will say is it's likely, given that we just delivered 130 basis points of leverage in 2013, it's likely that our 2014 leverage won't be quite as large. We guided to reported operating margins being about flattish, that's where you probably wouldn't expect quite as much leverage. Yet we will still be very focused on it.
Great. Thank you.
Our next question will come from Adrienne Tennant with Janney Capital Markets.
Good afternoon. Let me add my congratulations on holiday and the year. Glenn, I was wondering if you can give us some more color on the analysis that went behind the decision to raise minimum wage to nine this year and then ten in the out year. Is that in effect rate as we speak, or is that going to be in effect? If so, at what point in time? Along with that, is there additional training or responsibilities that accompany those higher wages? Thank you very much.
Well, the analysis was fairly extensive. It was more what we said on our releases on Wednesday, was a strategic decision that we've been looking at for a period of time, and it was a little bit grounded in the launch of Reserve in Store back in November of last year. Staring at our roadmap, and I just mentioned on the call that we're looking at order in store, we're looking at other initiatives that are going to support the omnichannel roadmap for the company. As we look at all those initiatives, start off with Ship From Store, Find In Store, really dependent on store associates explaining that to customers, selling that, tell them it's a benefit, and Reserve in Store is a step above that. Order in store is another step.
As a management team, we sat back, talked to the brand presidents, and we just came to realize that, in spite of what other people may be thinking about stores and their future, we're actually looking at the role of the store is going to incrementally increase as more and more of these initiatives and these ideas and these convenient services get provided to customers. In terms of the economics, we have always changed our rate of pay in June of every year. The $9 for 2014 is going to start in June of 2014, and the $10 will be effective in June 2015.
Okay, great. Thank you so much.
Our next question comes from the line of Simeon Siegel with Nomura.
Great, thanks. Good afternoon, guys. I was just wondering if you could parse out the strength of the online business. Were there any particular areas of strength there by geography or concept? Just out of curiosity, when you report the online sales, does that include the omnichannel purchases?
I know the answer to both, but yes to the second one. The first part, I mentioned in the opening comments, we've been very pleased with our international growth when it comes to online. Now that we're into multiple years, it's not only the growth, but it's the penetration to our total store sales. Very good numbers in the U.K., although we have the service in France and Italy as well for other European stores. Very strong in the U.K., continue to be strong in Canada. It's been strong in Canada for three and a half years now since we've launched it. We're in Japan just about a year now, which is a Ship From Store model, which we're going to move to ship from distribution center, but penetration is really beyond what we thought it was going to be.
We've opened in China day 1 in November of 2010 with our stores. We did a test, which I'd like to see us roll out. I'll be talking to our head of franchise for Gap this weekend. We did a test in our Turkey franchise market, where again, that was a ship from their distribution center. It's a turnkey online that we brought to them, and we feel very good about the results so far. I'm sure all of our franchisees, knowing that the corporate market strategy for us is this multi-channel, multi-brand approach. I've talked to a lot of our franchisees, and they're also interested in the specialty stores, which they all have now, moving quickly. If this Turkey test continues to go where it's going right now, moving out to the franchise markets and looking at our outlet stores.
International market's very strong and no real need to report anything by brand. I think we've been pleased with all business performance by brand, except for maybe a little bit stronger than we thought it was going to be in 2013 with Athleta. The reason behind that is when you take a fleet from 35 to 65, even though our strategy is to not have a level of cannibalization in our online business, we've been pleased with how strong our online business continues to be with Athleta as we add the physical presence to that brand.
Just to underscore what Glenn said, the revenue's booked where the transaction takes place. Our Ship From Store sales, because they're made online, they're all booked as part of the online sales. And those have been robust, especially as we've brought more of our fleet onto Ship From Store and has certainly helped our growth rate online this year as well.
Got it. Then just quickly, Glenn, to your point about the opportunity to improve the promotional dependence, do you see opportunity on the AUR front this year? Or to your point about the healthy merch margin, is that more sourcing, I guess, Sabrina?
I think we look at it this way. We look at there's a number of initiatives I talked about in the opening call. One of the ones worth highlighting is responsive supply chain. The purpose behind that is customer first. When we talk about AURs, it's really about top-line growth, and that could be driven by AUR. What we're really looking for is through a responsive supply chain, and I covered off at the beginning, as Sabrina added some color behind it in her comments. I think that is a path to get better top-line growth, which is then better market share growth. We believe that one of the metrics that will drive that top line in the back half when responsive supply chain starts to kick in should be some improvement in AUR.
That's what our brand presidents are accountable for, and that's what they're executing towards for the back half of 2014.
Great. Thanks, good luck for the year.
Ladies and gentlemen, as a reminder, please limit your questions to one per participant. Your next question comes from the line of Matthew McClintock with Barclays.
Hi. Good afternoon, everyone. Glenn, I was wondering if you could focus a little bit more on your earlier comments on personalization. It seems like that has been an idea that's been talked about in the industry for several years now, always seemed longer term in nature. I was just wondering if now, if 2014 might be the year that we start to see meaningful impact on your business from personalization. How should we think about the growth and the development of that capability relative to other omnichannel capabilities that you have, such as Ship From Store, Reserve in Store, which you rolled out pretty quickly. Thank you.
Let's say, Matt, that it's on the roadmap that we have. 2012 was really the beginning of Ship From Store. As I said, we're now looking at in Q2 to start to put into our stores the capability of order in store. That could be doing it on your own. That could be self-order in store, whether that's through some kind of kiosk we're going to put in. We've been testing a lot of different tools or whether that's actually with the aid of the service. That's the reason why the wage strategy is so important. Personalization, we've really only been working on for the last three months, and there isn't a day that goes by that we're not testing a personalization idea on the web.
We've been big fans for a long time, getting away from this macro approach to consumer communication and getting into Person Casting. We have the data, we've been fortunate, given our geographical location, to really put investments that are in our P&L in 2012, in our P&L in 2013, to build the big data environment we need in order for personalization to begin on the web, first and foremost. That's serving up web pages with the goal of getting a higher click-through. That could be by category. That could be by certain promotions. Customers historically have reacted better than other customers. I think it's not to use the bridge analogy again. I think it's a stepping stone to loyalty, and that's what everybody wants to get. It's our definition of loyalty.
This is not loyalty you sometimes see in different sectors where for you pay $0.99, you have a card, you pay $0.79. I think that's an historical loyalty program. It's really looking at how personalization could then help unlock how we truly get to a loyalty play by customers and to this goal of Person Casting. Testing's been going well. We've been impressed with the numbers. When you think about it, how many eyeballs we see per week on our home pages, and we're serving up, excluding the tests we do on a daily basis, the same homepage to completely different people. We have to look at it differently for new customers versus lapsed customers versus existing customers versus people with high frequency, low frequency. We have all that information. We have an amazing team downstairs.
I've been very impressed with the results I see every month on the testing they've been doing. I'm not looking for much in the first half. I think as the testing continues to grow and we can figure out exactly what the driver is, click-through, which gets to conversion, which gets to higher sales, which therefore leads to market share. I think in the second half, it's something we're not talking about right now. Maybe a little bit more at our analyst meeting, hearing from Art Peck and members of his team. I think that there's something there in the back half that can provide some real value to the company.
Great. Thanks a lot.
Our next question will come from Paul Lejuez with Wells Fargo.
Hey, thanks, guys. Glenn, as you think about all the ways that you're growing the business these days, what are your current hurdle rates that you set for the company from a returns perspective? Then I'm just wondering, can you rank which projects you believe will be generating the highest returns, whether it be Gap China, Old Navy, Japan or China, Athleta in the U.S.? Just wondering how you're thinking about where the real high return projects are. Thanks.
I'll start, Paul, with that. Glenn and I obviously work very closely and spend a lot of time on capital allocation. Our starting point is to sort of look at our long-term weighted average cost of capital. Our hurdle rates are going to be several points above our weighted average cost of capital because projects we approve, we want to make sure, even if they have some variability to their pro formas, that they're going to deliver for us. We have pretty high bars with regard to returns. With regard to our priorities, that's precisely how we set them as we look at the ranking of the various cases and geographies that come to us.
Importantly, we take a long-term view, or certainly we would never have launched something like China, which is going to provide us with an enormous runway in the long-term, especially in terms of revenue. It already is contributing significantly to revenue. Takes a longer time to return because of the uniqueness of the market and the infrastructure needs. There is a lot of discipline internally around looking at returns and prioritizing our initiatives around them.
I'd say in some kind of order. I think this is being repetitive, Paul, from maybe a few calls ago. Our franchise business has the highest return and will continue. That's why you see Old Navy are going to do five to six stores in the Philippines in 2014. That's the beginning of the Old Navy franchise rollout. Takes almost no capital from us, a very small amount. The returns have been phenomenal. We always try to build on what Sabrina said. We always try to look at capital holistically. We try to look at every year as a pool of capital, like this year. What are the right decisions for the company strategically? How do we make those calls to get a good blended capital? Franchise, global outlet and factory stores, global online.
That's why my opening comment is talking about these very strong growth rates in the U.K., in Canada, in Japan and China, with not a lot of investment, an investment that's returning multiple times over. I'd say from a brand perspective, yet to be proven. If you're just asking me sitting here today, what do I think we're going to feel really good about in the next two, three, four, five years to come, it's going to be Old Navy International.
I think that that business, if we go into the right countries as we have in Japan, as we will in China and in the franchise business, the real estate opportunity in those countries where you can get really a percentage rent that's super attractive and get sales per foot better than we get in North America and get an economic model that I really think we can have, where the percent of business on promo and the depth of discount is not as large. I think that business has the potential, assuming we execute and that Stefan's international team stay on that business and its true potential. I think that really has a great return for us.
Two other projects I mentioned upfront that are not growth based, omnichannel should have a very good return on capital for us and seamless inventory when it gets going in the latter part of 2015.
Thanks, and good luck.
Our next question comes from the line of John Morris with BMO Capital Markets.
Thanks. My congratulations, too. Glenn, can you give us a quick holiday postmortem, ex weather and mall traffic, what could you have done better so we can set our sights on opportunities for next year? Also just a quick follow-up on Athleta. The growth there really meaningful now, approaching 100 stores by the end of the year. Beyond your previous remarks, share with us the performance there. Is it balanced regionally? What are the strengths and challenges? Thanks.
Well, John, the holiday question, we could be on here for a long time. There isn't a holiday or actually any month that goes by where I don't think the company is trying to learn what could we have done better. We came out of Thanksgiving and realized that December was not likely going to play out as we had planned many months ahead of time. It became a little bit more with some traditional ways of communicating and engaging customers and trying to get them either in stores, online, and get the conversion in our business to produce the one comp we had. Look, I think holidays changed, and we need to look at it differently. To say we've had multiple meetings would be an understatement since the first of January for all of our businesses.
This is the benefit of having a portfolio, is how does Old Navy approach it? How does Online, Banana Republic, and Gap in particular, how do they approach the holiday business for the benefit of Gap Inc.? There's some lessons where it starts earlier. There's lots of ways in which we looked at it and said, if we could do it again, what we'd do differently. It all starts with product. I think that I would just say from my perspective, just to give you one lesson, it wasn't the top of my list, but it's probably one I can say on the phone, is that as you move into December and more and more people are looking at gifting as opposed to self-purchasing, that our industry and us in particular, really don't offer as much gifting choice as we should. I think that's a design issue. That's a merchant issue, that's a marketing issue, and that was a clear lesson that the whole business looked at as we were all in stores, all looking at our online, whether it's on an iPad every night and putting ourselves in the shoes of customers coming in on December 12th. Again, whether you're on your smartphone or in our store, what are you looking for? Did we offer that? Did we sell it? Did we market it?
Personally, I was disappointed. We had a one comp, and I'm sure that gained share relative to everybody else. We should have done a lot better, and that's one of a number of lessons. We're very happy with Athleta.
It's not often we single it out, and maybe it's a little optimistic of us or me, in this case, to call it the fourth iconic brand within our portfolio sooner rather than later. I was very impressed with our performance in 2013. We have some new leadership. They made some very good decisions. I think the trends in the marketplace when it comes to women and when it comes to performance and fashion and how they're dressing in general and the products in which we offer and the changes in which we are making, they just seem to fit hand in glove. This is a brand that's resonating for a lot of different reasons. As you suggest, to get into 100 stores, it starts becoming a more serious business for us. We haven't had conversations yet of an international business.
It's just we have a 100-store plan coming out. It's very strong online. It's gaining in terms of consumer awareness and acceptability, and I think the profile of the age of our customers has changed in 2013. A very good team, very focused. It's a great brand, and the business is, we couldn't be any happier with the acquisition and looking forward to 2014.
Thanks. Good luck for the upcoming year.
Our next question will come from Omar Saad with ISI Group.
Thanks for the question. You guys talked about, I think, 2.5% square footage growth. I think you've mentioned the highest rate since 2007. I know a lot of it's coming internationally. What's really giving you the confidence overseas? Is there an inflection in the brand awareness? I know you threw some numbers out on China. Are you going to require greater levels of marketing to enhance the brand awareness in some of these new markets? It seems like a pretty big inflection. Thanks.
Look, I would look at it a number of different ways. If you just look at the international markets, we'll open at least between 70 and 80 franchise stores in 2014. That's a little bit of Old Navy coming in, but filling into existing countries, introducing new countries. We understand the franchise market really well, and that's leading with Gap, following Banana Republic. Gap has very strong awareness around the world, and we only put disproportionate amount of capital when the awareness is below a certain threshold we find acceptable. If you start in some kind of order, our global outlet business continues to be really strong, a little bit domestically, but really filling in international markets. It's the only investments we're really making in Europe right now. We're happy with our specialty fleet. We've closed what we needed to close in the U.K.
We have the right store fleet in France. We're just on hold in Italy, waiting to make sure we get clarity on the economy and the marketplace. We continue to fill in with a global outlet. There, in Japan, in China, I think that's sort of the first area we're putting money, and then here comes China for Gap specialty. Sabrina said earlier, we have treated China in a different way than we've treated any other country. We continue to make investments in marketing that are appropriate because the long-term benefit to anybody going to China is to really establish a strong brand and a bond with the Chinese consumer. Communication and standing for something, that's important everywhere in the world, but it's particularly important to newer brands. We've only been there three years in a country like China.
There's some capital going there, and then Old Navy International and Athleta. I just finished answering John's question about the extra 30 to 35 stores for Athleta in the U.S. That is an easy decision, Athleta, and Asia is, for us, at least with our brands and the introduction of Old Navy, also easy decisions. Now, some people we compete against open 400, 450 stores in countries, and that's their decision. We're much more thoughtful. We have a different approach. There's 190 corporate stores plus the 70 to 80 franchise stores. Call it 260 to 270 total stores. That's a very good year. It's almost a store a day. We're really happy with that amount of presence and investment. Don't forget, this is a business that has a two-dimensional strategy, and the other part of that is online.
While the store fleet investment that I just described makes sense, we're also not going to end up having the number of stores in any of those markets on a per capita basis like we have in the U.S. The online day one opening it up, it's a different customer in 2014 in China than it was in 1994 in the U.S. That two-pronged approach is so important to us and allows us to do the number of stores I described, we don't have the need then to do 400, 450 stores because we can get the volume and the return and be current with our digital strategy.
Briefly on the marketing side, we haven't said anything explicitly about 2014, but I think 2013 is good evidence that we were growing internationally while we held our marketing dollars. We actually brought them down slightly from 2012. I think that we're holding to the discipline that our marketing levels are very healthy, we can look to reallocate and reinvest in those areas that are going to support our future growth the most.
Thanks, Glenn and Sabrina.
Our next question will come from Brian Tunick with JPMorgan.
Great. Thanks. My congrats again. Tough year. I guess, Glenn, we haven't really talked about merchandising at all, and you guys are still an apparel retailer. Just wondering, as you have a cohesive team now, maybe for Gap and Old Navy, can you talk about which categories you see as opportunity to drive the business in 2014? Are there any big businesses out there you're excited about to rebuild productivity at both Gap and Old Navy? For Sabrina, 2013, I guess you ended the real estate cleanup process. Wondering what kind of store comp you need domestically to get ROD leverage going forward. Thanks very much.
Thanks, Brian. Look, we'll answer any question if somebody wants to ask us about product or merchandising. We're only as good as the questions we're asked. From a category perspective on Gap, not a big change, but I would say that the team is focused on a couple areas. One, we've seen a change and a shift in our baby business, at not the expense of kids, but more powerful baby business than kids. I think you're seeing that team that we have in New York under Rebekka's leadership, putting some investments, whether that's in new categories or that's just in the inventory going there. I think the baby business is going to play a much more prominent role in Gap brand going forward. That's a merchandising change for sure. The other one, this has nothing to do with athletic.
I'm sure the Gap team would have landed there themselves, but as more and more trends start to push women in particular towards street attire, we start looking at the balance between the athletic part of our business and the going-out part of the business and sort of the, as a lot of people have been talking about, this is the new denim. Gap is very well situated with its GapFit product as a foundational product to building to this new trend that's going on in the marketplace. If you go to any of our stores, you'll see that business being pulled out of GapBody's traditional space in the store and brought more and more closer to the front of the store. I think that trend that's going on that fits with Gap and its American casual style and how women are dressing, especially millennials.
I think you'll see some merchandising changes in that part of the business when it comes to Gap. At Old Navy, it's tough to sort of choose one over the other. I'd say that they've been a little less pleased with their men's business the last little bit and realizing that they're making some changes in that area, not only in merchandising, I'd say in marketing, in store visuals. That's something that our customers should be looking for very clearly. The other part in that business is they do so well in denim, the Rockstar was a big launch for them a couple of years ago and really elevated their overall positioning on denim. You'll see something next week, that's just the start, but you'll see Old Navy getting in and trying to establish their pant business for women.
We're in the bottoms business as a total company, and that's true of all brands, Banana Republic, Gap, and Old Navy. From a merchandising perspective, I think this second complementary investment of marketing and product and inventory and location of store and space on the website for pants, casual pants, is going to be a really big play for Old Navy in 2014. There's a bunch of other puts and takes. I could say the same thing with Banana Republic, but all of them come in to every season and every year based on strategically where they want to gain share, where they see an opportunity, does that fit with the position of the brand, and those are just a couple of examples for Gap and Old Navy.
Yeah, with regard to rent and occupancy, it's a great question, Brian. To leverage rent and occupancy, we definitely need positive comps. I think for one of the reasons you mentioned, the leverage in our future will probably be more modest than it was in the past. There's really two reasons. One is what you mentioned, that we have a lot of the cleanup of the North America optimization behind us. That, in past years, really, while we were closing a lot of unproductive square footage, helped us leverage quite a bit of ROD per point of positive comp. Secondly, while we remain focused on leveraging ROD within every country, as we enter some of these international markets, the rent per square foot generally is higher than it is in North America.
When you look at the mix growing that way all in, it's a little bit of a headwind to leveraging ROD. We still feel good about leveraging on a positive comp, but the amount of leverage for each positive comp point will likely be more modest in the future.
Thank you. That's super helpful.
Our final question today will come from Lindsay Drucker Mann with Goldman Sachs.
Thanks for taking my question. Hi, everyone. I just wanted to follow up on Sabrina. The discussion about underlying ex some of the currency issues, some healthy merch margin behavior. Can you talk about how much of that is AUC based on some of the fabric platforming and other initiatives versus less markdown focus and where you think that's really going to come from? Maybe just give us an explicit AUC outlook for the full year.
Yeah, it's a good question. I think that the broad answer, Lindsay, is we're looking to get improvement in both areas, AUC and AUR, as the year progresses. We're not giving any explicit guidance on AUC. It hasn't been a headline either way in 2013, nor do we expect it to be any dramatic swings that would have it be featured as a headline in 2014. As I said, as the year progresses and we start to see benefits from tools like fabric platforming, that as we consolidate fabrics and continue to negotiate with our vendors, that certainly is rational to believe that that should bring us some costing benefit more in the back half as we implement that to a higher degree than in the front half.
I think as Glenn explained in an earlier Q&A, because of these supply chain tools, we should actually be able to do better in terms of assorting what we put into the stores and get a higher probability, whether it comes from true reg or less of a markdown margin. Any of the combination of those will take, but certainly we believe the tools in place are increasing our probability of getting better yield on the product we assort to.
Okay. Thank you. Just to follow up on the seamless inventory comment, Glenn, I think you talked about seamless inventory being in place for fiscal 2015. I know you have Ship From Store capability in the U.S. and have already, or North America, have already started to prosecute that. Where are you in how nimble you are with your inventories in store and the ability to service adeptly online demand versus in-store demand? How much more of an unlock is there from an inventory turn and efficiency perspective?
Lindsay, I'd say that we're Ship From Store enabled in every store. The issue is how many orders does each store receive on Ship From Store. We've gone from thinking of it, and let me just step up for a second. You're right. The Ship From Store was the precursor that opened up the thinking and the strategic decision to go with seamless inventory. Now back to where we are on Ship From Store. We started off as satisfying customer unmet demand online. We thought was at a higher service level than it turned out to be, based on the fact we operate only two DCs for our online business versus the stores that serve our customers in our store. That's how it started.
We got benefit from achieving a higher service level for our online customers by exposing all of our store inventory to that unmet demand online. It's graduated now to what is the yield management benefit of Ship From Store. Right now, when there's demand that comes online, could that be directed, even if the inventory is available in the distribution center, could that be directed to less productive markets or less productive stores where we have a history, or we currently know that ultimate AUR is going to be below, significantly below, where we're currently, the consumer is demanding and willing to pay on an online order.
The sophistication has changed, and that's a little bit in place in Q1, but more will be rolled out, and it's just our view of going, "Look, let's just expose our inventory in a seamless way and let it go to the highest AUR we can get." If that's online and it's in the store, net of a shipping cost, is that better gross margin for the business. The reason that is that markets can perform differently, as some people are experiencing in December and January. That can happen. It can also happen that stores, because of their physical size, have an assortment that is a little different for that store. Even though our stores have been right-sized, they're still not all perfect. There's a history where that store has a lower gross margin than another store.
Let's just turn that demand to where the biggest opportunity is and pull that inventory out. The second thing we're doing is on seasonal changes, like when you go from outerwear in December to an assortment change in January, the liquidation of inventory in January in certain stores can be very expensive. All of the people in our business have units below cost. The demand online is a lot less seasonal. It's amazing how much outerwear we sell online in January, December, and March. Sorry, January, February, March, relative to what we sell in the store.
Keeping that item alive online at a very attractive price, and then using that demand, let's say in the third week in January, but directing it to a store before that inventory goes to a price below cost, which can happen in the apparel business, then you can, as they say, you can pull an arbitrage on the gross margin and sell it for a much higher AUR online. It's this constant evolution of how we're thinking about Ship From Store. The reason that seamless inventory is such a big priority for us, it is the opening up our perspective of inventory and let it go to the highest gross margin dollar per unit in a country, in a distribution center geographically, and in a store.
When you open that all up, the opportunity for us in 2015, Ship From Store is one small component of the eventual strategy on seamless inventory.
Thanks a lot.
Great. 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 fourth 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. You may now disconnect.