Of investor relations.
Good afternoon, everyone. Welcome to Gap Inc.'s second quarter 2013 earnings conference call. For those of you participating in the webcast, please turn to slide two. 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 are 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 most recent quarterly report on Form 10-Q, all of which are available on gapinc.com. These forward-looking statements are based on information as of August 22nd, 2013, we assume no obligation to publicly update or revise our forward-looking statements.
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. Sabrina will come on the call in a few minutes and give you the details of the company's financial performance in the second quarter. Before we get to that, I just got a couple of comments on Q2. I want to talk a little bit about the second half. Of course, you'll hear from Sabrina. We'll take all your questions. On Q2, the company had very good sales results on a number of different fronts. We felt good about the comp at a +5. That's a two-year +9, which is good performance, and it's the second quarter in which we've achieved an internal goal of comp to comp. I think that that's good performance for Gap Inc. in the second quarter. Unlike a lot of other retailers and brands, we continue to give monthly sales.
We've been giving them in the six years that I've been here. We like it. We think it's transparent. That's not a commitment we're going to do it forever and a day, but for now, we think that makes absolute sense. I do want to say to everybody on the call that with the consumer environment we're dealing with and the changes in consumer behavior, there's always going to be lumpiness from one month to another. I think I've said this before, but it's worth reiterating. We report our sales monthly, but we manage our business quarterly. We come out of the quarter, regardless of how it may flow by month, we feel very good that the company achieved the five comp for the second quarter. That's very good performance. I was also really happy with our total sales.
We had an 8% reported total sales, but if you FX adjust that number, it's a +10, which means Gap Inc. had about five points of spread between comp and total sales in the second quarter, which is also a very good performance. Lastly, I want to highlight, like I did on Q1, our online business grew by 27%. Just coincidentally happens to be the same number as it was in Q1. It's also that very important channel where we're putting investments, where we believe we have a very strong share, and we differentiate ourselves, had a nice growth rate in the second quarter. It's nice to be able to leverage our business and set up an economic model, which you can do that with. To get 160 basis point improvement on our operating margin was nice to see.
That gave us a 25% increase in profit and a 31% increase in earnings per share. When you look at those numbers, I would say that Gap Inc. had a strong Q2. I'd like to give all the analysts and investors updates on growth. I did that extensively in the first quarter call. Everything's on track when it comes to China Athleta, our franchise business. Our growth initiatives continue to do well. Old Navy is open in mainland China. It will be in Shanghai, and it will open in the spring of 2014. Gap, it's open in Taipei, which will be our first store in Taiwan in the spring of 2014.
One thing I want to highlight in the second half where there's noticeable change and some evolution that's taking place across all of our brands, and that's in the marketing area. It's in two fronts. It's in messaging, and it's in the use of different mediums. From a messaging perspective, Old Navy, their creative platform, which they've been on for the better part of two or three years, is going to change. Old Navy's positioning is absolutely consistent and is unique in the marketplace, which is delivering fashion essentials for the family. After a couple of years, it's always good for you to reassess the platform and the voice of the brand. That's what the new team has done, and I feel very good about the second half on how we're going to continue to take this brand in a value sector and differentiate ourselves.
Banana Republic, if you've seen the Issa campaign that is out right now and the collaboration we have, I think there's brand new creative, and that's the look and the feel that all of our customers are going to see in the back half. I think it just needed a change. It needed to be freshened up. It needed to look a little more relevant, and I think that's what you're seeing in the Issa creative execution, and you'll see that kind of execution, that kind of look and feel in the rest of the back half. Lastly, Athleta, which has been a very strong success for the business, and we love the marketing behind it, which is Power to the She. That's what the brand platform is, and that's not changing. It's going to evolve its look a little bit.
We want the brand to be a little broader, and you're going to see some of that more around the holiday season. On the medium front, two things to report. One, that Gap is going back to television in the fall. Many times over the last four or five years, we've been asked if Gap would go back on television. I understand the question because of the heritage and the association with Gap brand and great TV commercials. I think the criteria for me has been pretty consistent. What's the strategy behind it? Do we feel the messaging is strong and unique? Do we believe the product is absolutely the right product in our stores in order to go out and spend the money on television, bring new people in? Gap brand has been able to check off all those boxes.
You will see Gap brand go back to television this fall. Don't ask me about holiday. I'll just try to get ahead of the question. I don't know the answer yet. Again, we got to go through the criteria and make sure everything's right. If everything's right, then we will consider television for holiday. That has not been decided yet. Another thing I want to mention is that we are really making a further shift in the back half of 2013 to try to acquire more new customers. For the last couple of years, I think a lot of our investment, the mediums we've used have been to strengthen our strengths with existing customers, at the same time as trying to speak to our lapsed customers. There's always marketing. If you put money in your windows, you're always talking to some new customers.
It's been mostly broadcast. Broadcast media. I think that the business now, with so many more tools and so many more choices for a company like us, you're going to see us put more money towards narrowcasting and really try to speak to specific group of customers that we believe should be experiencing the brand and should be in our stores and should be on our online site. That's across all six of our brands. Definitely that's going to be a focus in the second half because it's important for a business like ours, in order to continue to move the business forward, to have the right balance on loyal customers, lapsed customers, and new customers. Let me close this portion of the call off by saying that all of our product for fall and holiday is bought.
From my perspective, our design and merchandising teams have done a very good job. Like any business, you learn from the previous year. You have to make adjustments. You have to make sure that you're putting the focus and the energy behind where you can dominate. That's why for years we've been talking about a comp is an outcome. That's why each one of our brands, as they build up their assortment, they know what categories they're going to dominate on, where they're going to differentiate themselves, and that's where the focus is. Look, we've been doing this for years. I just think this year coming into fall and holiday is just another year where the team has moved the needle forward. I like what the design and merchandising teams have done, and now it's over to execution.
It's over to our marketers I talked about earlier, our inventory management team, our store leaders, our online teams to really make sure they take the product that's been designed and execute it to the highest level possible to do what? Of course, to win. To win more and more customers and to gain market share. That's the business we're in. I think we've done that in the first half of this year. If you look at the first half was a market share gaining first half. It's certainly our goal sitting here today to replicate market share gains in the second half. With that said, let me pass the call over to Sabrina, then I'll answer any of your questions after she's finished with her comments. Thank you.
Thank you, Glenn. Good afternoon, everyone. We're pleased with our second quarter performance as we again met our goals, which include growing sales with healthy merchandise margins, leveraging expenses, expanding operating margin, and growing earnings per share. Please turn to slide three for our earnings recap. Our earnings per share for the quarter were $0.64 versus $0.49 last year. Here are some additional Q2 highlights. Net sales were up 8% with comparable sales up 5%. Gross margin expanded by 60 basis points to 40.5%. Operating margin expanded by 160 basis points to 13.5%. Net earnings were up $60 million or 25%. With S&P's upgrade of our credit rating earlier in the quarter, we are now an investment-grade credit with all three major agencies. Turning to slide four, sales performance. Second quarter total sales were $3.9 billion.
The translation of foreign revenues into dollars impacted our reported net sales. For the second quarter, our net sales were negatively impacted by about $56 million, primarily due to the weakening of the yen. On a constant currency basis, our revenues were up 10%. Total sales and comps by division are listed in our press release. Turning to slide five, gross profit. Gross profit dollars grew by 10% to $1.6 billion, and gross margin was up 60 basis points to 40.5%. Our merchandise margins were down 30 basis points and rent and occupancy leveraged 90 basis points. Please turn to slide six for operating expenses. Second quarter total operating expenses were $1 billion, up $44 million from the prior year. Marketing expenses were up $1 million to last year at $148 million. As a percent of sales, total operating expenses leveraged by 100 basis points.
Delivering on our goals of sales growth and expense leverage resulted in net earnings of $303 million, up 25% to last year. Moving on to the balance sheet on Slide seven. Inventory dollars per store were up 6%, broadly in line with our comp sales growth. Year to date, we generated free cash flow of $542 million, and we ended the second quarter with about $1.9 billion in cash. During the quarter, we distributed $97 million through share repurchases and dividends. Our quarter-end share count was 468 million. Though our share repurchases within the quarter were relatively modest, we're pleased to announce our intention to increase our dividend beginning in Q3 from $0.60 to $0.80 per share annually. This represents a 60% increase over 2012's dividend of $0.50 per share. Please turn to Slide eight for capital expenditures and store count. Year-to-date capital expenditures were $315 million.
With regard to company-operated stores, we ended the quarter with 3,106 stores. Square footage was flat to the second quarter 2012. Store count and square footage by division are listed in our press release. Now I'd like to share our outlook for the rest of the year. Please turn to Slide nine. Given our progress in the first half of the year, we are raising our estimate for full-year earnings per share from $2.52 to $2.60 to $2.57 to $2.65. At the midpoint, this implies a growth rate of 12% for the year. However, as we've called out, given the 53rd week in 2012, the cadence of quarterly earnings growth is uneven, with growth weighted toward the first half of the year. There are two important considerations for the remainder of the year. First, foreign exchange, and second, last year's 53rd week and the resulting calendar shift this year.
Beginning with foreign exchange, our full-year earnings guidance contemplates some of the impact of foreign currency headwinds, specifically the yen, which has depreciated by about 20%. This depreciation negatively impacts our reported sales and earnings. For example, our first half sales were negatively impacted by over $100 million. To be helpful, we reported sales in the Asia region last year of about $1.3 billion, the vast majority of which were yen based. Simply applying the 20% depreciation to this amount would equate to a meaningful headwind to revenue of over $250 million for the full year. Turning to the calendar impact. As we've noted several times, the fourth quarter this year has one less selling week than the fourth quarter last year. Additionally, the week that's dropped from the fourth quarter is a large selling week.
Just as the first quarter benefited from the calendar shift, the fourth quarter is expected to be negatively impacted by an amount that is larger than the benefit we saw in Q1, given the volume of sales for holiday is larger than the volume during the spring. Keep in mind that both foreign exchange and the calendar shift impact the spread between total sales growth and comp sales. Given these impacts, we expect spread for the full year of about one percentage point. Because the spread between total sales growth and comp sales in the first half was four percentage points, we therefore expect the spread in the back half to be far less than the first half. Aside from these two important call-outs, the following guidance metrics remain substantially unchanged. Operating margin, about 13%. Square footage, up about 1%.
Regarding company-operated stores net of repositions, we plan to open about 160 and close about 80. Store openings are weighted toward Gap China, Old Navy Japan, Athleta, and global outlets, while store closures are weighted toward Gap North America. We expect capital expenditures to be about $675 million and depreciation and amortization to be about $475 million. We expect our full-year effective tax rate to be about 39%. We expect Q3 inventory dollars per store to be up in the mid-single digits. In closing, we're pleased with how we executed against our strategies during the first half of the year. Of course, we're now focused on delivering on our goals for the remainder of the year. Thank you, and now I'll turn it back over to Katrina.
Thank you, Sabrina. That concludes our prepared remarks. We'll now open up the call to questions.
Yes, thank you. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, press *1 to ask a question. We'll go first to Kimberly Greenberger with Morgan Stanley.
Thank you so much. Glenn, the entire team has done just such a terrific job in what appears to be a very intense and competitive retail environment. I don't know if you've had a chance to sort of step back and just look at what's going on in your business relative to everyone else. Could you just touch on some of the key operational and executional improvements that you guys have implemented over the last one or two years to stabilize and improve the performance? Are you seeing any kind of encouraging signs in the traffic trends in your stores that's sort of potentially helping the comp trend?
Let me start with the first question. I'd say what we've been doing for the last three or four years is to balance out the company's portfolio. When the new management team started together, one of the comments that I think we made internally and possibly externally, is we've taken over a very nice hand. We just got to make sure we play it right now. Having a big business in the value sector, that's important. That's Old Navy. We have a brand in the value sector, so that's a great opportunity and a point of differentiation for us. Obviously, Gap
Iconic, more mid-market. Banana Republic, a little more of, let's call it affordable luxury, versatility, and in what I would call versatile work. Again, all three brands being different from one another. One of the things I've tried to do since I've been here is make sure that while there's always a little bit of internal dynamic tension between the brands, and let's face it, apparel is only so big, so there's going to be a little bit where they intersect in certain categories. I try to make sure there's enough differentiation between the brands. I think that helps us. As you know, for the last number of years, we've been pushing our online business and putting investments behind that because we know that's the future. We've always had a great platform.
We've just been building that platform, evidence of that is another great quarter of a 27% growth. That's good not only for where the customer is, but it's great for return on capital, great for return on sales. Simultaneously, we've been pushing the outlet business. A good opportunity where two of our brands, where they're established brands, but there's a value derivative of those brands. We put a lot of money and a lot of square footage has shifted into that business. Lastly, as we've gained confidence and made investments in our international markets driven by our franchise business, which is contributing nicely. It still has a long way to go in terms of its size. A lot more Banana Republics, a lot more Gaps in countries we're already in.
Next year will be Old Navy's chance to go in the franchise markets, that's also a business that has a very nice return on sales and return on capital. I think the biggest thing we've done is to balance out the portfolio. Now, although they're not significant contributors to this particular quarter, you have the new brand play between Athleta, Intermix, and Piperlime. I think one of our advantages, some people choose to have a singular brand, and that's where they focus, and that may make sense for them. For us, given how fragmented the apparel business is, where the leading market share player could have something like a mid to high single digit, coming to the market with different brands and unique brands and multiple brands into different channels and into different geographies.
Traffic. I think we've been stating on our monthly calls that traffic has been slightly negative. Maybe some people reporting in this quarter had traffic that was maybe better than that. Certainly seems like some had traffic that was worse than that. We would love to be able to continue to find the innovative and creative solutions that could get us to positive traffic. That's certainly not a goal we're giving up on, because our view is that somebody's always delivering a positive comp. Somebody's always delivering positive traffic. That's how we have to believe it, that in spite of our slightly negative traffic in the first and second quarter, that we strongly believe there's positive traffic to be had.
Holistically, when you add that up with our online business and put it together, it's a different picture. We're finding a way to drive UPT, to drive conversion, to drive average transaction in this environment where in spite of the innovative and creative marketing we may be putting into place, we're seeing slightly negative traffic. We're not giving up on that. We have great real estate because we've been around a long time. We've been repositioning our real estate over the last five years. There's no excuse on the quality of the real estate of the business, and we've certainly put capital into our stores. Now it's up to the marketers and the store operators to turn that investment into positive traffic.
Terrific. Good luck here in the second half.
Ladies and gentlemen, as a reminder, please limit your questions to one per participant. Your next question comes from Lorraine Hutchinson with Bank of America Merrill Lynch.
Thank you. Good afternoon. Sabrina, I just wanted to follow up on the decline in merchandise margin this quarter. What were the drivers, and what's your outlook for the rest of the year?
Yeah. The merchandise margin was down very slightly. Fortunately, as we've been calling out, that a big driver to our gross margin opportunities going forward is going to be in rent and occupancy. Very much as we'd expect, Lorraine, we're driving that expansion through rent and occupancy leverage on the positive comp. We said that past Q1, we were not going to have any AUC tailwinds any longer, and we just wanted to deliver our merchandise margins or our comp with healthy merchandise margins. We feel like in this environment, we very much achieved that in Q2. We'll always be looking to do well on the merchandise margin line, but a lot of our opportunity lies in the continuation of rent and occupancy leverage on a positive comp.
Thank you.
Next to Lindsay Drucker Mann with Goldman Sachs.
Thanks. Good evening, everyone. I was hoping, Glenn, on the last conference call, I think you talked about feeling better vibes from the consumer and the sense that things were starting to pick up. I was curious if you still have the same point of view and whether you can give us a sense on how August started and back-to-school started at this point. Thanks.
Well, I think you know us well enough that we're not going to comment on August. When it comes to back-to-school, it's obviously a moment in time, but it's not the holiday for our portfolio brands that may be for other retailers that you cover. Old Navy is really the only brand that participates in back-to-school. While it's important, and we certainly want to go out and gain market share and use it as a way to bring new customers into our stores, it's not something we're as dependent on as others. In terms of the customer, my views haven't changed. That all I can do is look at it from a high level and go, "Seems that there are positive signs on employment in this country and in some other countries," because we're a global player.
It seems like certain wealth creation, whether it's in people's equity in their homes or whether it's people who may be fortunate enough to be in certain stock markets, that that's creating wealth beyond what people would have had in 2012. Other, like anybody, we're doing our research, we're talking to customers all day long. We're trying to understand people's expectation of where consumer sentiment is. As I tried to say in the opening comments, we figured out as a management team in 2008 that we were dealing with a new paradigm that somebody coined back then as the new normal. In the new normal, it's not uncommon for customers, for very little reason or any reason, to go into hibernation. Whether that's for a month or whether that's for a quarter, that's just something that we've become acclimatized to.
Our team, as what I said earlier to the question that Kimberly posed, I look at it this way, that even if there was a period of time in 2009 or 2012 where for reasons that are out of our control, that customers may go into a period of hibernation. Our view is somebody's always winning, and somebody's always positive comping, positive traffic comping, gaining market share. Our position to our team, and one that I know Sri and I embrace is, that should be us. What are we doing in spite of a period that the customers may be in another category or delaying purchases, whatever they may choose to do because of this new paradigm we operate in. We still have to look at it and go, there's business to be had. There's traffic to be taken.
There's market share to be gained, and that's the attitude we have to take. We're used to it. Would I prefer it was like 2007? Sure. Would I prefer things were like the 1990s? As part of the 1990s, we're also attractive as a retailer. This is the customer we have. Our attitude is, let's just make the best of it, and let's do like we did in Q2, which is get a five comp, get total sales of 10%, and have a quarter that produced the kind of leverage that we had, and let's go and gain market share. We have a good portfolio of brands. There's no reason that shouldn't be us.
We'll go next to Janet Kloppenburg with JJK Research.
Good afternoon, everyone. Sabrina, I wondered about your comments with respect to gross margin, and it being July threw it off . I was wondering if that implied that you were less optimistic about full price selling opportunity in the second half of the year. Glenn, I wondered if you'd talk about the denim category. You've invested in it in a major way at both Gap and Old Navy. A lot of people are talking about a comparison to colored denim from last year, and I'm wondering if you think that could be a challenge this year. Thank you.
Hi, Janet. I will start with the first part of your question, my comment to Lorraine's question was in no way meant to imply that we had changed our outlook on reg selling. In fact, in the second quarter, we improved in terms of how much we sold at reg and promo. We sold less at markdown, more at reg and promo. We're on a really good path with good momentum there. I think our opportunity really lies in continuing to be quite surgical about our promotions and making sure that we are getting the highest yield we can and not giving away too much as we do what our customers value and want, which is some promotional activity, but continuing to manage those really well.
We did very well on the reg selling bucket, and of course, that remains an opportunity, but I think we have some good momentum there.
Thank you.
As far as denim is concerned, it's a dominant category for both Gap and for Old Navy. We would never abandon color. It's part of the DNA of both brands. Maybe a little bit more in Gap than it is at Old Navy. You're still going to see color. There's color still in our stores this fall. There'll still be colored denim in our stores in holiday. Is it less pronounced? It's less pronounced. I think our view is that trying to climb the mountain a second year in a row when a lot of people came in last year who bought a lot of colored denim from us. I think that there's still opportunity to sell more to them in the next six months.
The move we've made in either the marketing campaign for Gap of Back to Blue or the current marketing campaign for Old Navy, is we believe in going back to indigo with different treatments. Some cases, it's coated denim. Grays are very big for us. We're really pleased with the business we're doing in that category.
Between Gap Outlet and Old Navy and Gap, I think where we've made some really good decisions to not move away from color, but to maybe marginalize it a little bit versus what we had last year in the back half, and then add something new and fresh and try to make sure not only do we have the right different kinds of indigo interpretation, but we have amazing fit, that the inventory is done right, and that we count on people online in the store, and our marketing team to tell that story. We're pleased with how the marketing looks. We're certainly pleased with how the denim is showing up in the store. This is not just one month. This is what you see now is the foundational shift that we believe we had to make that you'll see in our stores.
Of course, there'll be new product coming in, but foundationally, the shift you're seeing is going to last us from now till the holiday.
Thank you.
We'll go next to Matthew McClintock with Barclays.
Hi. Yes. Good afternoon. Glenn, I thought it was interesting, the comment you talked about going after a new customer profile for all of the brands. I was just wondering if you could elaborate that or maybe give us some more color on what is the profile of the new customer versus your existing customer. What were some of the limitations that prevented you from perhaps going after this customer before? Thank you.
Yeah. Maybe in my opening comments, I may have misspoken. What the message was that the customer profile has not changed whatsoever. Neither has the position of the brands or, in many cases, the platform or the marketing. Our view is that if you just use Old Navy for a second and say that we have a customer profile, this is a targeted customer. We understand that customer, who she is, who he is, what their families are. In a business like Old Navy, if you just target that customer exactly as a percentage of the customers that are available for every X percent of customers, we may only have five or 10% of them.
Within that group, we look at it and go, "How are we holding on to our loyal customers?" Which I think disproportionately, that's been our obsession coming out of 2008, 2009, feel like I'm a historian today, back to giving you a history lesson, coming out of that period of time, we really focused on holding on to the customers we had. Then the last year, maybe 18 months, you've seen some of the investments and some of the mediums we've been using to make sure that we can address lapsed customers.
This is where big data is important, because now we can look at information and look at tendencies of customers who are loyal and what makes them lapsed and try to get to them and speak to them and incent them in some cases before they become a lapsed customer to stay loyal with us. While we're saying about new customers, Matt, is there's a lot of customers in our targeted profile who really, believe it or not, either have not tried us and have not come into our stores, whether it's online or into our stores, or they were with us a number of years ago. With the changes we've made to our assortment, to our product, especially Gap and Old Navy, that we need to go out and speak to them.
There's so many more tools now and so many more ways to target a specific group of new customers to get them to experience your brand that were not available to us five years ago. That's where we put a lot of money in the last five years, is not only in understanding customer files, but trying to actually get bigger files that can talk to similar profiles, because these are customers who have no history with us, let's say, in the last two to three years. That is, to me, a missed opportunity. Our marketing teams and our brand presidents know that.
The last thing you want to do is to gain a lot of share on a big holiday like July 4th and go out and have the right product, the right messaging, and gain share, then the very next day, after a big holiday like that, go and talk to the exact same customers. They've been into your store. They've gone online now. You're not going to get people to unnaturally frequent a brand. Share of wallet is important, but we got to get to new customers. I think what you're going to see in the back half is no incremental marketing necessarily, but a shift in some of the marketing to speak to new customers. That's one of the reasons Gap's going back on television.
Thank you, Glenn. That's very helpful.
We'll go next to Betty Chen with Wedbush Securities.
Thank you. Good afternoon. Congrats on a nice quarter. I was wondering, Sabrina, the SG&A number leveraged very nicely in the second quarter. Can you remind us of some of the opportunities, or is it mainly coming from leverage on the top line? And whether some of those opportunities can continue into the back half, and how we should think about that line item. Thank you.
Yeah. We did do very nicely on SG&A, and we continue to be very disciplined on that line item. I would say the two primary drivers helping us in the quarter was all of our store-related expenses did very nicely and were well managed by the teams and leveraged nicely. And then as well, lapping last year's big investments in marketing, where we're sort of on a nominal dollar basis, you can see holding those marketing dollars being up only $1 million. Those are providing some nice leverage as well. So those are probably the two biggest buckets. As Glenn sort of alluded to, in the back half, we'll continue to be disciplined, certainly. Marketing, because we invested so much last year, we certainly don't intend to divest, but we're probably not going to increase those investments a lot. So they should continue to leverage.
The only thing I'll call out, of course, is that in the fourth quarter, because of that lack of the 53rd week, of course, leveraging is going to be different in the fourth quarter than it is in the other quarters.
Thank you.
We'll go next to John Morris with BMO Capital Markets .
Thanks. My congratulations to everybody in a fairly challenging environment for some. Glenn, I think a question for you about one of the initiatives that I think went live last quarter, the Reserve in Store initiative. How is that going? What are you seeing from it? What kind of benefits are impacting the business, maybe in terms of metrics, thinking about the UPT, et cetera. Thanks.
You're right. We launched it about eight weeks ago. It's in a total of 40 stores divided into two cities and into two brands. That's in Chicago and San Francisco, and it's Gap brand and Banana Republic. Just to take a step back, it's another point along the journey for us when it comes to omnichannel. We were early in the Ship From Store, which is more than a year old. We obviously, this is all about dealing with the customer first. We realized the Ship From Store was helpful.
We realized the power of Find in Store, which is making sure a customer, before they make that first decision to start a journey, can go on our site, hit the Find in Store button on a particular product and find out the availability of that product within a store within 25 miles of where they currently are. That's a tool I think we still need to invest in and educate people on. We know one of the biggest challenges everybody in retail faces, maybe a little more pronounced in apparel than maybe if you're in the drugstore business, is when they see something that you can get them excited about, whether it's through the marketing you're doing out of home or in magazines or windows in your store or something online, of course, on their smartphone, is will it be available.
Think about that when a new collection launches or something like a collaboration with Issa. Trying to find out if it's available, that's that battle that customers have with themselves because that's the nature of this industry. It could be gone very quickly. Find in Store was very important. Find in Store gave birth to Reserve in Store. To answer your question, John, I just want to just give you a little bit of the path we've been on. We've been really happy with it. It's unique. It's different than pickup in store. I think that we're learning a lot of lessons, but we've learned a lot of lessons in the last eight weeks.
The one I can share with you that's most interesting to me, there's a dozen little anecdotes like this, but the percentage of people who are reserving in off hours has been really interesting to me. I didn't see that coming. I knew that would be a feature we could talk about. Just imagine now that basically the marketing message coming forward, because part of the test is to inform us as we roll this out to more markets in the fall, is how exactly do you position this? Why would I want to reserve something in store?
With the crazy world we all live in and the hours people have to put forward their business life, their personal life, the ability to go on at 10:00 or 11:00 or 6:00 in the morning and see something that really is something you want and to reserve it and then be able to get a text from us when the store opens, I think that's proven to be a much bigger draw than I thought it was going to be. I think as we roll this out, that could be part of the marketing as basically our store is always open. You can always find out from us. Place a reservation and first thing in the morning, our team fulfills that.
That's one of the lessons, one of many lessons that you'll see us apply as we make the decision to roll this out further in the fall to more than just two cities.
Very helpful. Thanks.
We'll go next to Dorothy Lakner with Topeka Capital Markets.
Thanks. Good afternoon, everyone, and my congratulations as well. Maybe tagging on to that last question, Glenn, I wondered if you could talk a little bit about the split between e-commerce and stores or the lack thereof. There's been a lot of talk, I think, on other calls, where perhaps results have been weaker about online-only retailers taking market share and how many stores are you going to close and kind of the conversation moving towards, is the stores business going away? Clearly, you're ahead of the pack anyway because you closed so many stores over the last decade. You really cleaned up the stores portfolio. How are you feeling now about the omnichannel business and the power of having stores versus or with the online capability that you have as well?
Well, yeah, just one point before. We've only started closing stores five years ago. We probably shouldn't have opened stores in the first five years of the decade you're referring to. The store closure program really started in 2008. We'll have it completed by the end of this year. We've said publicly there's always going to be maintenance closures you got to do or repositions. We have a big fleet. You heard Sabrina talk earlier, just under 3,200 stores. Big fleet like that, there's going to be more than onesies and twosies. You're right, we got ahead of the pack because that was one of our strategic initiatives in 2007. I don't know. We see it in a completely different way. I may be wrong with this number, but if nothing else, it's directionally incorrect.
In the last quarter, I think Amazon's number, who are pure play, were up 22%. We've been up 27% the last two quarters. I think it all depends on people's definition of the omnichannel. For us, the omnichannel definition is that the world becomes seamless and is totally transparent. It's all about serving the customer. If a customer, to John's question, is in Chicago and wants to reserve something at 11:00 at night and get a text from our team at 9:05 after we open at 9:00 saying, "It's here, Dorothy, and it's waiting for you, and we're going to hold it here for 24 hours," that makes the store incredibly valuable.
Yeah.
The other thing I want to mention to you that it's a stat I gave out recently, is in spite of the fact that more and more customers are experiencing our brand online first, that number should hit about 50% this year, where your smartphone, your tablet is the first place you go to experience the brand. The one number that has not changed is that, this is six years running now, 80% of our customers actually want to go try on the product in a store. Even though the smartphone, tablet, and experiencing virtually and online of the brand and being able to lose yourself and do your own discovery and shopping online, and that's why investments online are very important, the store matters in our category.
What better advantage do we have than to build a transparent, seamless environment, as I mentioned to John, that started with Ship in Store, Find in Store, Reserve in Store, and as I'll talk more in September, as I attend a conference in New York, is about the ability now to personalize that experience and be very cognizant of the power of a physical bricks and mortar location and an offline and bringing those two together. I think that's who's going to win in the long term, those who can do that in our category.
Just to underscore Glenn's point, Dorothy, when we report comp, we've said that online generally contributes about two points of the comp.
Yes.
With our five comp in the quarter, certainly you can see that our stores underlying have a very healthy comp.
Great. Thanks, and good luck going forward.
We'll go next to Jennifer Davis with Lazard Capital Markets.
Hey, guys. Congratulations on a great quarter, especially in this challenging environment. Sabrina, first, a quick clarification. Did I understand this correctly? Did you say that the impact of the calendar shift on fourth quarter EPS would be greater than the $0.08 benefit that you saw in the first quarter? My question is, how much fabric or what % of fabric are you currently platforming? How much has that increased this year, and how much more room do you have to go with that? Thanks.
Yes, you listened really well, Jennifer, as usual. That's exactly right, that the negative impact to the fourth quarter is larger than the $0.08 that the first quarter benefited from. Then I'll let Glenn take the fabric platforming.
Haven't had a chance yet today to use our analogy with innings, I would say that on a fabric platforming, the benefit of that will really be felt in the first quarter of 2014. We likely came from an environment where, earlier this year, we're probably in the 2nd inning. We get into the second half in the 3rd inning. I think we'll catapult ourselves to the 6th or 7th inning in the first half of 2014. Then the target we have, what % of our total business will be fabric in a fabric platform environment into a toolbox. Part of this started with fabric reductions and eliminations and consolidation. That was very important. Once you get that done, that's the work that's been going on for the last six months, you get into a platformed environment.
We'll be a little bit of progress in the back half this year, we'll have it all done by the second half of 2014.
All right, great. Thanks, best of luck.
We'll go next to Brian Tunick with JPMorgan.
Great, thanks. One for Glenn and maybe one for Sabrina. I guess, Glenn, as you hindsight with Stefan on the Old Navy business for the first half, just curious from a category or execution perspective, what were you most happy with, and where do you still think Old Navy has the biggest opportunities as you guys work together? Then maybe for Sabrina, it looked like you only bought back, I think, $27 million worth of stock in the quarter, and you didn't raise the dividend after the close. Just curious, should we be thinking about you're gonna be increasing the dividend faster than you buy back stock, or just any thoughts on the capital allocation.
On Stefan, what I can say about him is that he's harder on himself than I am on him. Look, a lot of the impact, Brian, that Stefan's making on the business will more be felt in the back half. Just in fairness to him, he started in October of last year, now we didn't have him necessarily jump right into the business day one. His biggest impact is yet to come. I would say, building a great team, which he's done, which is 75%, 80% of people in the company already, putting the team together, getting everybody very focused, has been very important.
The fact that he really believes and loves what this brand stands for, because sometimes you bring new people in spite of how you may interview them and what they may say, you get them in the seat for 30, 60, 90 days, and some people may have different opinions. I love the fact that he's been consistent since the first day he's here of what this brand stands for. He's evolved it. He's polished it up. I think he's gotten really good clarity in the business about what's important for him and how Old Navy's gonna go out and win. You can't debate the fact that he's had a pretty good execution with the product that he inherited, which was a good product. I mean, the team before him did a very nice job.
You still have to have somebody who has to take that, as I said earlier in my opening comments about the second half of this year. You still have to have somebody who stewards that through. Second quarter comp of 6% is good performance. I think that that's where he probably had his first initial commercial impact in the business. I think that's very good. He found the right balance. I like the fact that he didn't unnecessarily chase any given month. As I said, people look at our business internally as we obviously have the long, long view that Sabrina and I have, which is measured in years. Our brand presidents look at their business on any given quarter. He didn't unnecessarily chase one month versus another. He did make the right decision, and he produced a very good quarter.
With that all said, I'm excited about the second half for him because his view of Old Navy, his view of fashion apparel, his view of how he's gonna bring that brand and continue to build on it and build on it and win, I think some of that will be felt in the second half.
Yeah. Then with regard to, I'll call it cash distributions broadly, none of our philosophy has really changed, Brian. We're big believers in distributing our excess cash to shareholders, and we will continue to use both the dividend as well as continued share repurchases. With regard to share repurchases, the stock's actually just moved up. We're pleased with that quite a bit year to date and even within the quarter. We tend to be opportunistic, so we just haven't caught that wave at the right moment. There's been plenty of years where we do a lot, if not the majority of our share repurchasing in the second half. We're still very open to that program, and we'll look forward to continuing it. The dividend increase really is about underscoring our commitment on the dividend side as well.
Stepped up the dividend in a meaningful way at the beginning of the year, but truly probably increased it at the more conservative end of the payout range we like to be at. We were at 25% with a $0.60 dividend per share. Part of that is when we increased the dividend at the very beginning of the year, we were contending with more uncertainty with regard to the tax rates just being lifted on capital gains and dividends and the fiscal cliff situation, the debt ceiling situation. With more clarity on that, we felt really comfortable stepping up the dividend to the higher end of the payout range that we'd like to be in.
We'll go next to Oliver Chen with Citi.
Hi, everyone, this is Nancy Hilliker filling in for Oliver Chen. I have one question related to just product. In terms of athletic apparel within the different brands, Gap, Old Navy, and at Athleta. Could you give us an update on how athletic is performing? It seems to be a popular category this season. Also, if you could just give us a little bit more information on updates with Intermix and Athleta and performance there in particular.
Well, what I would say is women's athletic apparel has been popular for many seasons, and it's the reason that not only did we decide to make the decision to acquire Athleta, but also to boost our presence in that category by really introducing GapFit into the Gap business. You can see the active product and the active brand you see at Old Navy. Our view is that this is not cyclical, that you have a long-term opportunity where women in general are looking at different combinations of occasions and outfits, and you don't have to walk too many malls or too many schools or see people on weekends. It'd be a little bold of me to call it the new denim, but there is something about the occasion of wearing something that's very fitted, that you're comfortable in, that's casual, that can also look good.
I think that we've covered the bases because similar to denim, you have different people buying at different price points. You have Old Navy, who have their active bottoms, which again are doing extremely well at $29. You have Gap with GapFit at $49, and you have Athleta around the $79 price point. To us, as the category continues to grow, if it is like denim, then we are really well-positioned on really where the majority of the business is going to be done are going to be in those three price points. As long as the people who run those businesses continue to differentiate them, put the right technical properties into them, make sure that the fit is phenomenal and consistent, and then you can have fun with it. After all, we're in the fashion business, unlike other companies.
When it comes to color and print and patterns, that's something that comes naturally to our teams. I think that we're really well-positioned in that business. Intermix, again, we're just very happy. It's early days, and we'll open a few new stores this year. I think the team's doing a good job in New York, and I think Art Peck that's leading it is really trying to think about the business strategically. We're really happy with the brand, and it just gives us a chance to get not only the learning we're going to benefit from at Gap Inc., but a chance to provide some of the advantages Intermix would never have on their own. If you think of what we're really good at, we're really good at the online. This is no order of importance. We're really good online.
That's something that could really help the Intermix business. We understand real estate and fleet management. That's something that we can really help Intermix with. The list goes on and on about how do we combine our competitive advantage and our strength to this really good brand and gain share in the luxury business, which is not something our portfolio had the opportunity to do before we acquired it. So far so good and more to come.
Thanks so much. Congratulations.
We will take our final question from Ike Boruchow with Sterne Agee.
Hi, everyone. Thanks for taking my question. I guess the question's on marketing. I guess it's a question for both Glenn and Sabrina. Glenn, the idea to go back to TV for the first time in 4 years, could you talk about what the rationale was and how you thought about that from an ROI perspective? Then, I guess, Sabrina, when we think of your advertising dollars have been roughly low single digits up in the first half of the year. You're going back to TV in terms of how much that costs, how should we kind of expect that for Q3 in the back half, if you can give any guidance?
Well, I'll just start from a financial perspective. We feel really good about the investments we're making in marketing. Even though our traffic is still slightly negative, it has been improving from Q1 into Q2. With regard to the television, I will tell you that the team has just done an excellent job of being really efficient with that spend, because unlike the last time we were on television, which was holiday 2009, when we used to invest quite a bit of dollars to do national network TV, we're no longer pursuing television in that fashion. It's going to be much, much more focused and surgical on our top markets and buying spot TV, which I think these days especially, is just much, much more efficient than that old national network. That's how we're keeping the dollars well in hand, and we think it's a solid investment.
I'll turn it over to Glenn.
I mentioned in the opening comments that there's different gates at not just Gap, we're not picking on them, that if anybody wants to shift their investment in any kind of significant way, again, the investment increase is not going to happen. Moving the money around and experiment with new mediums. We tend to get involved those conversations. Gap, very effectively crossed all the gates. I talked about my opening comment. The big thing for me is television is to be repetitive as the medium, but what I like is the content that the team is putting together that can be used in social, it can be used in our online site, it can be used in cinema, it can be used on television. The content is what's important.
Our CMO for Gap, who's super talented, working with Stephen Sunnucks, and the team has come up with some great content. Within the framework of how much money they have to spend, which even in four short years, between 2009 and today, the options for that team are multiples more than they would've had in 2009, where television was probably 90% of the use of expense on the content we developed. I'm not going to give the number, but it's a number much, much less. Although it's still a very important medium, you're much less dependent on it. I think the knock-on effect of television and all the other levers that the team is going to use is going to be great. I think the creative was well thought through. I think it's very Gap appropriate.
I think it's in a season we got something to talk about, which is Back to Blue, back to our heritage, what we stand for, how we want to differentiate ourselves. I feel good about what they're doing. As I said, whether this produces another use of that medium, we're going to produce content for holiday. Whether we use television medium is to be determined, but we're going to have content. That's how I'll leave it with you.
Great. Thanks so much.
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 the full recap of our second quarter results, as well as the forward-looking guidance included in Sabrina's remarks. As always, the investor relations team will be available after the call for further questions. Thank you.
Thank you. That does conclude our conference. You may now disconnect.