I would now like to introduce your host, Katrina O'Connell, Vice President of Investor Relations.
Good afternoon, everyone. Welcome to Gap Inc.'s first quarter 2013 earnings conference call. For those of you participating in the webcast, please turn to slides two and three. 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 of measures were required to reconcile to GAAP financial measures, please refer to today's press release, as well as our most recent annual report on Form 10-K, which is available on gapinc.com. These forward-looking statements are based on information as of May 23rd, 2013, and 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.
Now I'd like to turn the call over to Glenn.
Thank you, Katrina, and good afternoon, everybody. Before I hand the call over to Sabrina, who will take you through the Q1 financial highlights, I want to take you through how we as a business are looking at the first quarter, and also want to give you an update on our key initiatives for 2013. The one thing that comes to mind when I think about Q1 was the consumer. Now we've been operating pretty much for the last five-plus years in a very challenging environment. This is the first quarter in a long time that I think the consumer, to us, felt like they were moving in a positive direction. Things are still challenging, but they're starting to feel a little bit better for a lot of reasons that I'm sure we've all read about or know about.
I'd like to think that that's a good sign as we look forward to the rest of the year. Obviously, the news story is that we were able to get a 2 comp in Q1 2013. On top of the 4 comp we had in 2012, also known as comp the comp. Last year was obviously a good performance for the business, driven by the investments we made in product and in marketing. There was a little bit of weather help in 2012, and there was a color trend. I think our teams came out very strongly in this first quarter, and I think it's nice to see across all of our businesses, good two-year comp performance in our three key brands. To me, the big driver of that continues to be our product. That we continue to have good product momentum.
Comp is an outcome, and all of our merchants and designers and marketers and our brand presidents know it takes good strategic thinking on where we're gonna dominate and where we're gonna differentiate in each one of our categories that builds up to a comp. When I look at the quarter and I look at the categories at Banana Republic and Gap and Old Navy, the ones that drove over and above performance were the categories that we're putting a lot of time, effort, and money behind because we think we can get market share gains. We can get an edge, and we can get more customers to engage with our brands by showing that these are the categories, whether it is suiting, whether it is bottoms, whether it is dresses. These are the categories that are gonna differentiate ourselves against our competitors.
Lastly in the quarter, just one more number I wanna talk about was online had a 27% gain in revenue, and that's key to us. Everybody who knows our business, the multiple channels, outlet, specialty, franchise, and in particular online, is really a key strategic initiative. Up 27%, while the majority of that base is in the U.S., we are seeing really strong growth in Canada, Europe, China, and now in Japan. Let me just pivot for a second and talk about our strategic initiatives. First and foremost, it's about growth, how the company is gonna grow, what new initiatives we have going on. We've been clear about where we're putting our investments. In our February call, we reiterated that in our investor meeting in April. Franchise store count is on track. We feel good about the countries we're gonna enter.
We feel good about the balance between Banana Republic and Gap. Our global outlet openings, everything is coming together on that front. Again, multiple country openings. Openings here in Canada, in Japan, in Europe. I was just in China to see the fifth store open. That's a good opening for that very important channel in this most important of countries. China, everything is going well. That team just continues to impress me. They have an aggressive agenda for 2013. For one, they're prepared, and the consumer and the environment is just right for us in China. I think everything there is all systems go. Old Navy Japan, we opened nine stores in Q1. Unlike most real estate, it's been my experience in the years I've been doing this, real estate tends to be back-e nd loaded.
I was very proud of the team that they opened so many stores up in the first quarter. I'm gonna be going there at the end of June, but from all intents and purposes, looked at the numbers, the customer feedback, the launch strategy. That's really impressive to see that, and that really gives us great confidence going forward. Intermix is on track and Athleta openings are on track. They are absolutely executing as we would expect in these two developing brands. We feel good about the prospects for the rest of the year. The last thing from our strategic initiatives I do want to touch on is omni-channel. In the quarter, we launched ship from store for Old Navy. All of Gap is now on ship from store. Banana Republic was in 2012.
We're easing our way into getting more stores and more categories on. The launch has been smooth. The store execution has been great. This whole idea between a customer now going online and seeing that everything is available. As we've talked about many times, the psychological impact of showing an out-of-stock online, the majority of our customers, when they see an out-of-stock online, something not available, not in their size, not in the right color, then they assume it's not available in the store. That is just, from a marketing perspective, huge value to us, but also the ability now to use our pools of inventory seamlessly and to take something from a store and ship it to an online customer. It's really just a preliminary step on this amazing continuum we have for the omni-channel. We will be launching reserve in store next month.
That's in Banana Republic and Gap. It's a pilot, but again, the ability for a customer to seamlessly engage with our business, to go online, see something that they love, reserve it, get down to the store, hopefully buy more, have an amazing customer experience, I think is good for loyalty. The next step along our path to get to a true competitive advantage and differentiation in the marketplace by acknowledging that the way to win these days is with great product, compelling marketing, and giving customers access to your business anywhere they want. That's why we call it Easy Buy Anywhere. With all that said, as I said in the press release, we're pleased with our first quarter. It's nice to get off to a good start. The first week of every month, the first month of every quarter, and the first quarter of every year are very important.
It's good that we got off to a good start in this first quarter of a new fiscal year. I'm going to hand it over now to Sabrina, who will take you through the financial highlights. Sabrina?
Thank you, Glenn. Good afternoon, everyone. Our first quarter performance represents meaningful progress against our 2013 financial goals, which include growing sales with healthy merchandise margins, managing our expenses in a disciplined manner, and delivering operating margin expansion and earnings per share growth. Please turn to slide four for our earnings recap. Our earnings per share for the quarter were $0.71 versus $0.47 last year. However, it's important to note that of the 51% earnings per share growth in Q1, about half was due to the benefits from the calendar shift and from the favorable resolution of tax issues. That said, we are pleased with our underlying operating performance for the quarter. Here are some highlights. Net sales were up 7%. Comparable sales were up 2%. Operating income increased by $135 million, or 34%, and operating margin expanded by 290 basis points to 14.2%.
Net earnings were up $100 million, or 43%. Turning to slide five, sales performance. First quarter total sales were $3.7 billion, up 7%, with comp sales up 2%. Total sales and comps by division are listed in our press release. Of the five percentage point spread between total sales growth and comp sales growth, about half was due to the impact of the calendar shift created by the 53rd week in fiscal year 2012. As a reminder, this year's first quarter dropped a small week in February and added a much larger, more full-price selling week in May. The translation of foreign revenues into dollars negatively impacted our reported net sales by about $45 million in the first quarter. This translation impact was primarily due to the weakening of the Japanese yen versus the US dollar.
In fiscal Q1 2013, the average exchange rate of the yen was roughly 18% less than for fiscal Q1 2012, or JPY 80 last year versus JPY 95 to the dollar this year. Turning to slide six, gross profit. Gross profit dollars grew by 12% to $1.5 billion, and gross margin was up 200 basis points to 41.4%. Our merchandise margins were up 160 basis points, largely driven by decreases in average unit costs, and rent and occupancy leveraged 40 basis points. Please turn to slide seven for operating expenses. First quarter total operating expenses were $1 billion, up $34 million from the prior year. Marketing expenses grew modestly by $4 million to $143 million. As a percent of sales, total operating expenses leveraged by 90 basis points. Expense leverage also benefited from the calendar shift in the quarter.
Therefore, we would caution against extrapolating this magnitude of leverage to future quarters. Delivering on our goals of sales growth and expense leverage resulted in net earnings of $333 million, up 43% to last year. As I've mentioned, our earnings in the quarter included about $0.04 of benefit related to the favorable resolution of tax issues in the first quarter. About [$18 million] of the benefit is reflected in interest, and the other $0.02 of benefit to EPS are reflected in the tax rate. Moving to the balance sheet on slide eight. Inventory dollars per store were up 3%, broadly in line with our comp sales growth. The plus three is on last year's 7% decrease in inventory dollars per store. For the quarter, free cash flow was an inflow of $205 million, roughly equal to last year.
We ended with about $1.6 billion in cash. We distributed $128 million through share repurchases and dividends. Our quarter-end share count was 466 million. Please turn to slide nine for capital expenditures and store count. First quarter capital expenditures were $151 million. With regard to company-operated stores, we opened 10 stores on a net basis and ended the quarter with 3,105 stores. Square footage was up 0.3% compared to Q1 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 10. As we said in our April sales recording, our first quarter operating performance was broadly in line with our expectations at the time we provided our full year guidance in February.
Therefore, nothing has meaningfully changed in our full year outlook. We are reaffirming our full year earnings per share guidance of $2.52 to $2.60. To be helpful, there are two important considerations for the remainder of the year. First, as we told you on our Q4 call, our full year earnings guidance contemplated some of the impact of foreign currency headwinds, specifically the weakening yen. Since we provided guidance in February, the spot rate for the yen has weakened by about another 10%. The average spot rate for the yen last year was about 80. Current spot rate is about 103, or about 29% depreciation. This depreciation negatively impacts our reported sales and earnings as our local currency results translate into fewer dollars. Second, as we've noted several times, the fourth quarter this year has one less selling week than the fourth quarter last year.
Additionally, the fourth quarter of 2013 drops a large fall selling week. Therefore, just as the first quarter benefited from the calendar shift, the fourth quarter is expected to be negatively impacted by an amount that is at least as large as the benefit we saw in Q1. For the full year, 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 Q2 inventory dollars per store to be up in the mid-single digits. In closing, we're pleased with how we executed against our strategies in Q1, in particular, driving a positive comp in revenue growth on top of last year's strong performance. Of course, now we're focused on delivering our goals for the remainder of the year. Thank you. Now I'll turn it back over to Katrina.
That concludes our prepared remarks. We'll now open up the call to questions. We'd appreciate limiting your questions to one per person.
Yes, thank you. If you would like to ask a question, please signal by pressing the star key 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 star one to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll go first to John Morris, BMO.
Thanks. Congratulations, everybody, on a great start to the year. I guess, maybe Glenn, you talked really effectively, you and your team, when we had the investor day, about the seamless inventory initiative, which you touched on this morning in your prepared remarks. It sounds like it's rolling forward maybe a little bit faster and into place than some of us might expect, which is great. Wondering if you can talk a little bit more about the performance contribution potential you might see coming from that. I know it's hard to predict, but maybe it's helpful to think about it relative to some of the global competitors who have some of those initiatives already in place that you would probably know about.
Okay, John. I'd say there's really two parts that we talked about in April. Just from a terminology perspective, this is a seamless inventory. The idea behind that, and that's going to take a little bit longer. That's more of a midterm opportunity for the company. The idea behind seamless inventory is right now as a company, and this is true of almost every single apparel company, with likely the exception of Inditex, that we have inventory that is either in a country, but it's inside of a country like Japan, then it's inside of a distribution center that's online, inside of a distribution center that could be for stores, and then it's inside of our 150 stores in Japan.
The idea behind this is with the systems we're putting in place now and some changes in process, how do we make sure their inventory becomes seamless so when it leaves a factory from a vendor, that 100,000 unit PO that was agreed to weeks before that, just before it leaves, it goes to the most appropriate country where it makes the most sense, where we can maximize our sales and maximize our gross margin dollars because it's matching supply with demand. When it gets inside of the country, again, how do we make it seamless between, let's assume that you had a single distribution center, that would make a big difference for us. When it gets inside of that distribution center, how do we make sure it's seamless between the online channel and the stores?
That's a project that we've already done some work on. We're building the base, and I think that's going to be more of a 2014 and beyond opportunity. The other part that could be, I guess, viewed as seamless inventory is what we're calling a more responsive supply chain. That is really us as a business, and this is something that, in hindsight, I probably should have pushed a little more aggressively inside the company, but we've told people in the past that our supply chain, in order to become more responsive, needs to be built on having much more fabric platform inside of all of our mill relationships. Once you have fabric platform, you can be a lot quicker on basic inventory and seasonal basic inventory to get a read and respond.
We've done some of this, so there's some of that going on in the company today. I guess if I was to characterize it, if what we consider to be world-class, we are probably in the second inning from a standing start. We're probably in the second inning right now of actually getting to a more responsive supply chain. Some of that will happen in 2013 a little bit, but again, most of the benefit from changing how we operate, changing the brand's operating model to be much more in a responsive supply chain will happen in 2014.
Glenn, are those potentially contributive in the hundreds of basis points over time? Just order magnitude benefit.
It's tough to quantify. All we've said, John, before is that the people with the highest operating margin in our industry are in the high teens, and we are in the, call it for argument's sake, the mid-teens. Some of that difference, not all of it, some of that difference is that they have embraced a more seamless inventory management operating model, and their business was built on a responsive supply chain. We're different businesses than the leaders when it comes to operating margin, but I think there's definitely some application for us that we're, again, some of it's in place now, but a lot more to come. It certainly doesn't explain the whole delta of 400 or 500 basis point difference between ourselves and the leading company in our sector. I think there's some differences.
There's some of that can be explained through the fact that we haven't embraced ourselves, those two opportunities. More to come, and we'll see if we can get it in place for 2014, but there's certainly value attached to it. I just can't quantify it for you today.
Very helpful. Thank you.
Ladies and gentlemen, as a reminder, please limit your questions to one per participant. Your next question comes from the line of Kimberly Greenberger with Morgan Stanley.
Oh, great. Thank you. I'll add my congratulations as well to a really terrific quarter. Glenn, when you think about the operating margin opportunity from some of these strategic goals, maybe you could just rank order them in terms of where you think that the greatest profit opportunity upside might be. Is it the seamless inventory or the more responsive supply chain? Over the next sort of year or two, do you think you've got an opportunity to further lower your average unit cost, or are you sort of seeing some stabilization there with perhaps some wage pressure creep into either late 2013 or 2014 costs?
I guess there's two parts to it. If I focus exclusively on average unit cost, the opportunity clearly for us is to use less fabrics in the business. Our vendors are becoming more and more sophisticated, and they're spending money on equipment, and they're able to take a fabric now and do multiple things through washing and treating it that they couldn't have done five years ago. I think that having fewer fabrics inside of each one of our brands and committing for a longer period of time, let's call it for a year or more, to that fabric, I think still gives our designers and our merchants huge flexibility to do the right thing on product. We're not going to sacrifice anything for efficiency to not give them the ability to do the right products in all the categories I talked about earlier.
I think it's clear to us now that we can reduce that, give our sourcing team an ability to go work with the mills by having less fabrics and going for longer commitments. I think there's value in that to be unlocked inside the company. Whether that value can offset wage pressures and everything else that's going on in everybody's supply chain, that's to be determined. I'm just happy that, as I stated probably five years ago, I'm just happy we still have lots of opportunities to improve the business either from a cost perspective or from an earnings perspective, because what I'm identifying here from an AUC is something that we do today. We just don't do it as much as we should. The company's always had lots of priorities. The great thing about Gap Inc. is we're rich with opportunities.
This is just one we talked about before that I believe we can do a lot more with this, and our vendors agree, and the reason I know this, I was with all of them. I spent 10 days in March in Korea and China and India, I was speaking to them about how much more we can do, explain to them our plan, trying to quantify the value of that. Our team is working aggressively to get that one component done. On your first question, it's tough to rank them, Kimberly. What I'd say, there's three opportunities we spoke about at our investor meeting in April. I apologize, some on the phone who wasn't there.
We talked about the omni-channel opportunity, which I think there's value unlock in it for sure, and we're pretty far ahead, and there's lots of components to the omni-channel that should generate real value, and the value I'm looking for is in the sales line and in the market share opportunity. As the two I just talked to John. Ranking them is difficult. I think all three have contribution and value to be unlocked between the three of them. The only thing I would add to it, there's not much difference between the three. There isn't that one is worth a lot, and the other one is just a marketing term that we're using because we want to look like we have opportunities. All three have opportunities and value to be unlocked.
I'd just say they're all equal for now until we actually get them in place and get a read from our customers and see what it can generate in terms of incremental earnings for the company. We're fortunate to have all three of those opportunities available to us.
Great. Thank you.
We'll go next to Matthew McClintock with Barclays.
Hi, good afternoon, and congratulations on out-comping the comp.
Thank you.
Essentially, I have one question. You talked about 27% online growth, and that really is outstanding, particularly given the size of the overall business. I was just wondering if you could drill into that a little bit more. How should we think about that growth rate being representative of the omni-channel investments that you've been making relative to maybe more traditional e-commerce traffic and growth drivers? You also touched upon China e-commerce growth and other regions. How does your omni-channel capability set you apart from your competitors in these other regions, these international regions? Thank you.
Matt, I'll just start, and I'll turn it over to Glenn. Just as a reminder, on all of our sales in the first quarter, including our online sales, and we are really proud of the underlying growth, but it definitely benefited from the calendar shift. We've talked quite a bit, and I said it again, that this first quarter dropped off a small February and added a May. All of our sales, including online, benefited from that. Now I'll turn it over to Glenn.
The only thing I'd add to that, Matt, is while I think it's easy to go to the omni-channel initiative, then point to the online number, and there's some truth to that. It's still early days for us, and I probably don't want to have too many baseball analogies today, but it's still early, but there's some contribution. As Sabrina said, it was calendar shift and probably a little bit of omni-channel, but the underlying business has been healthy for a long time, and we've been gaining market share online for a number of years. That continued in this quarter. I think when we think about it, when we're going to have to figure out how to help you and the other people on the phone identify the value of omni-channel.
One of the big unlocks is obviously as more and more people experience the brand through online, and our traffic becomes at some point, I could see this coming sooner rather than later, where more traffic begins online than starts in the store. With the different components of omni-channel, a big part of this is getting people to experience the brand but get them into the store. That won't show up in the online number. It should show up in the traffic number. It should show up in the generation of earnings from a four-wall contribution.
While the early parts of omni-channel are helping a little bit on the online and more to come, the big win that I'm waiting for is getting people who are more comfortable starting online to experience the brand, be inspired by what they see, and then get them into the store. Internationally, if we had what we don't have today, but there's obviously a roadmap we've put together. Well, when can the North American components of the omni-channel make their way internationally? Certainly, in a market like Japan and China, that'd be leading edge. I think a lot of the omni-channel work, and I travel around the world a lot, seems to be coming out of North America, and in particular, United States. In Europe, we'd like to get it in.
There's some very good retailers in Europe, and they're very innovative, and I think they're already advanced in some of these areas, not necessarily in our sector, but in some other sectors. I think that the sooner we can get some parts of our omni-channel total package into the European business, I think that'll help our European brands compete and also allow them to gain some market share.
We'll go next to Oliver Chen with Citigroup.
Hi, guys. Congratulations on a great quarter and a great year. Regarding, Glenn, your comments on the customer sound quite encouraging. What gives you that conviction? I feel like in this conference call season, we've been hearing mixed signals in terms of caution from other management teams and volatility in the marketplace. Secondly, could you comment on looking forward for Old Navy? Some of the comp last year was driven more by units. What do you think about going forward for the opportunity to comp there on the unit versus AUR? Thank you.
Well, look, we don't have more of a crystal ball than anybody else, what I try to quantify in the following is that the environment is never going to go back to the way it was in 2006 and 2007. At least we don't see that anytime soon. We wish. I did find this first quarter, we have our own research we do. Obviously, we talk to customers a lot. We get feedback. When you couple that with good macroeconomic tailwinds, which are starting to develop, whether that's on the job front, may not satisfy a lot of people, but it's still good to see. Whether that is in people's wealth that's tied up in their homes or in their 401(k)s, I think all those things are positive signs.
We're certainly not predicting that the consumer sentiment levels that were in place six or seven years ago are going to return anytime soon. We look at a number of different metrics, but one that I'm particularly, because I've studied it for a long time, a fan of, is the Reuters University of Michigan survey that comes out, I think that consumer sentiment has been moving nicely in the right direction for the last 12 months. Still a long way from its peak, but I think we're comforted by the direction it's taken. I think that that's good news.
Yeah, on the Old Navy piece, Oliver, it's a good point. Last year, when we were lapping 2011's high average unit cost, when the average unit cost came down, especially for Old Navy, because we had pulled so many units out in 2011, we were putting them back in in 2012. A lot of our comp was driven by that re-infusion of units, but really just to get it back to a normalized level. I would say at this point going forward, we're sort of at a position where AUC is stable. It's not a big story either up or down.
We will be managing the business in a more normalized fashion, which is to say we need to drive our comp with some increase in unit sales, but with the healthiest AURs we can achieve to meet our goal of delivering that comp growth with healthy margins.
Thank you very much. Good luck.
Thank you.
We'll go next to Janet Kloppenburg with JJK Research.
Hi, everybody. Congratulations on a great quarter. It looks like it's continuing. The stores look just terrific right now. I wanted to ask Sabrina, if you could let us know what your AUC benefit might be in the second quarter versus last year. Glenn, given your discussion about the brand strength and the sourcing opportunities, I was wondering how you felt about the promotional levels at Gap and Old Navy in the first quarter, and if we could expect any change there in light of how you are feeling about the consumer confidence. Thank you.
Yeah. With regard to AUC, Janet, what we did say was that the first quarter is really the last quarter where we get the tailwind from all of the movements up and then down on average unit costs that happened in 2011 and 2012. From this point forward, the AUC is really sort of a non-issue. The delta in AUC in the remaining quarters is not a meaningful change from the prior year. Then I'll just start off on your promotion question and let Glenn finish. Certainly, this year, it's been well documented on all the earnings calls before us. Certainly, this year versus last year, given the weather patterns in February and March, this year was less favorable for retailers overall in general, just given those weather patterns.
For the quarter, across the board, we were probably more promotional than we were in 2012. That said, I think we're very pleased. You can see it in our merch margin performance and our overall performance. We're pleased with how the teams managed those promotions very surgically. We were still able to deliver on our goal of getting that comp up with nice margins.
When we think of the two brands that you mentioned, Janet, look, at the end of the day, Old Navy is a brand in the value sector. I think that as long as they're being creative and innovative and, in a lot of ways, aggressive, that's what Old Navy needs to do, given, as we talked about at the investor conference, that market share for us in North America is really one of our top priorities. I don't want excessive promotions at Old Navy. I don't want ideas tripping over one another so a consumer gets confused. If they come out on big weekends, like we have this weekend, and go out and dominate and show strength and drive incremental traffic into their business and gain market share, then I think Stefan and his team are doing the right thing.
For Old Navy, to me, it's always the voice. It has a personality. If they're just going to be 40% off on Memorial Day weekend, I expect more from Old Navy to really come out and present its story and what the brand stands for. I encourage them to be aggressive because that's why it's a member of the portfolio, because it's in the value sector, and its aggressiveness is one of its traits. At Gap, while I completely agree with what Sabrina said in the first quarter, I think that we put some more marketing into that business. We're feeling better about our product. We put some money into stores in some of the key cities around the U.S., in San Francisco in New York, in Toronto, in Chicago.
We're actually expecting that as they continue to improve upon their product, their assortment strategy, the marketing continues to be driven strongly in the back half of the year. I don't feel good sometimes with a promotional level at Gap. That's an iconic brand. Yes, you need to talk about your value proposition. That doesn't mean they're going to be void of promotions. That's just the world in which we operate. I think that I would expect as long as those three other components I spoke about earlier continue to strengthen and get better, that their need as their brand health and their relevance in the marketplace grows, and it is growing from the research we have, that they would have to be less dependent on some of the promotional decisions were made in the past and find a better balance.
Thank you.
We'll go next to Adrienne Tennant with Janney Montgomery Scott.
Hi, everyone. Let me add my congratulations. Well done. Glenn, your unit normalization strategy obviously has been very successful at Old Navy. I was wondering what, if anything, would make you consider possibly building units at the Gap brand. For Sabrina, a clarification question. The 252-260, does that exclude the $0.04 benefit? When you said that it comes out of the fourth quarter, is that the $0.08 shift? Thank you.
Why don't I start with both of them quickly, and then Glenn can follow up. On the units, just to be clear, our goal, Adrienne, is as we're driving comp is to balance units with AUR. I will tell you, unit sales across the board for Gap Inc. were up. I don't want to leave you with the impression that we're pulling units out of Gap brand. That's not true.
Right.
We're actually marching to that same balance.
Okay.
We are increasing units at Gap Inc. across the board, and no brand is a standout in that. Everybody's up and managing their AUR. With regard to the guidance, the way to think about that is there's $0.04 of tax benefit. $0.02 are in the rate, and the rate piece is really just a timing difference because the full-year rate is still 39%. The $0.02 that came into interest, that is a one-time benefit that does flow through. The range is an $0.08 range, and there's lots of pluses and minuses. Just as it's legitimate to bring that $0.02 from the interest on tax through, there's other offsetting items happening as well, and I called out one of them, which is the yen.
Right.
With the yen moving, I think of them together like one's going up, the other one's hurting us.
Got it.
We'll see the degree to which it does. Does that answer your question?
That's super helpful. That absolutely answered it. Thank you very much.
Great.
We'll go next to Ike Boruchow with Sterne Agee.
Hi, thanks for taking my question, and congrats on a great quarter. I guess, Glenn, a question on the marketing side of the business. I know you guys don't give guidance on what you're planning in terms of dollar growth or anything like that. Just when you look out for the remainder of the year by brand, where do you see the most investment, and are you planning on doing new things, especially around the holidays?
Well, it's a little early to tell. We're just finishing up the holiday product storylines and the assortment strategy from the team. We, Seth Sigman and I, have been very consistent on marketing. We feel that with the additional marketing we gave and allowed our brands to use in 2012, and mostly with Gap brand, where we put some money out of home and focused on our top 10 DMAs, and we got some benefit from that. That's why we didn't pull it back in 2013. We didn't add to it, but we didn't pull it back because we saw some benefit from the Be Bright campaign, and that was resonating with people. I think that we've always felt that there's an ample amount of marketing for our brands to differentiate themselves because our storyline has always been that Gap Inc.
We are a portfolio owner of six American brands, and we don't run stores. Therefore, there's always a need for some marketing to be able to make sure that people understand what Old Navy and our Gap, Banana Republic, and our other brands stand for, what differentiates them, how are they going to win. The marketing is a key part of that. Beyond just what it can do for traffic, there's a story, and I'm feeling better about some of the stories coming out from the team. The money and the investment, I don't see a need to put much more money into the brands. Now, the brand presidents want to make their own decisions, and we will guide them, we will advise them. I think they're also content and have come to a place that they realize they have more than enough money.
The challenge from us is, are they putting them to the right channels? Are they putting them to the right mediums? Are we getting the right mix? I'd like to see us do more and more on the social side. I think we've done quite a bit. I'd like to see us do more. There's certain points that we're bringing forward and some data that we're sharing with them in order for them to make the right decisions. So far, no need for more money. We've never taken anything off the table.
If Gap wanted to do anything different from holiday, if all of a sudden they thought television made sense, which I'm not saying it does, or they're even contemplating that, as long as it's within the total budget that we've agreed to and they want to do something else, that's their decision to present to us. Right now, I don't see much different from 2013 in terms of the playbook. Besides, the creative is going to be different, the story is going to be different.
Yeah. Just to be a little helpful, Q1 was up $4 million. Q2, as Glenn said, in spirit, there's no huge changes planned, we're certainly not planning on bringing it down in Q2. Directionally, he was talking about Q1 and Q2.
Thanks.
We'll go next to Lorraine Hutchinson with Bank of America.
Thank you. Good afternoon. My question is around the operating margin expansion potential for the rest of the year. What comp do you need to leverage your fixed expenses, and then where do you see some of the bigger opportunities for gross margin expansion going forward?
Yeah. On the leverage, Lorraine, because about half of our total expense base is related to stores and over half of that is variable to sales, the way we think about it is we will manage our expenses in order to leverage our expense base because we have that much that is variable. It's quite natural that we could use the levers to deliver that while still investing in our business, which is why we say you should expect in nominal dollars expenses to increase if we're increasing revenue, but we're always watching for that leverage. We sort of reverse engineer it, if you will, to make sure we can deliver that.
With regard to the margin rate, Glenn talked about the levers that we still have opportunities to, with the great product assortments, with the opportunities that will be coming in the future around seamless inventory, et cetera. We are always looking to improve our profile with regard to regular price selling, the depth of our promotions, the depth of our markdowns. That's obviously a very important lever. Then on the gross margin line, of course, we want to be leveraging our rent and occupancy, which we feel confident we can do on a positive comp.
We'll go next to Jennifer Davis with Lazard Capital Markets.
Hey, guys. Good afternoon. Glenn, I think I'm going to take you back to a baseball analogy. You referred to this a little bit, I think it was in response to Janet's question. Where do you guys stand in terms of putting money back into the stores and maybe increasing some of the store payroll, and the kind of help there? I think you still maybe have an opportunity there. The merchandise looks good, but some of the stores maybe aren't running quite up to the level they should be. Sabrina, thanks for the clarification around the calendar shift. That was really helpful. Just wondering how we should think about the second quarter and the third quarter. I know the shift won't be as big, but will you see a little shift between there? Thanks.
Look, I've been doing this for a long time, and what I know is that unfortunately, on any given day, something can go bump in the night in a store, and the conditions and the standards, the service can be below our expectations. What I will tell you is that two things. One, we started to put more money back into our business in last year's P&L as we became a little more comfortable with product and as the teams decided that there was a customer service model opportunity. One, I think they've done a really good job of is recognizing if you have a fleet of 1,000 when it comes to Old Navy, or have a fleet of 700 stores when it comes to Gap, that there are certain stores where you can actually get a return for that investment.
They've been much more thoughtful on where does the investment need to go. In Banana Republic's case, the return is in the fitting room. In Old Navy's case, we put more labor in, that's in replenishment. In Gap's case, we put more labor into their business. It's on the floor and actually engaging with customers. We understand our brands very well. We know what our customers want, and we know where labor at times needs to go because we've either tested it or we just understand our business well enough, what kind of return we can get.
I'm disappointed, obviously, if you're telling me in a backhanded way, as you've been to some stores lately and had liked the product but didn't like either the conditions of the store or the service level, and maybe you could tell Katrina where that was, and we're happy to look into it because we want to run a good business every single day. I know we just had our field conference here in San Francisco with our store managers and really got them not only motivated and pumped up about the opportunities going forward, but they understand the role they need to play in the business to run great customer service every single day. Now we track it. Just happened to have board meetings this week. Our scores are up again. We've had good scores.
With that said, Jennifer, my theory on retail is you're only as good as your weakest link. If we have a single store in the chain that is not running a good business on a given day, that hurts the overall brand. I know our field leaders understand that. I think the money is there, and maybe that was just poor execution, which is not acceptable from the way we look at our business.
Yeah. With regard to Q2 and Q3, our biggest notable shifts due to the calendar are absolutely in Q1 and Q4, as we've noted. I've heard people talk about Q2 and Q3, and we're really not seeing any meaningful impact from the shift in those two quarters. I think part of the reason may be that unlike some of our competitors, we have six brands, many of which don't play in back to school. Obviously, Old Navy does. They're the biggest, and Gap some too. I think with the six brands and the fact that we're probably also much more geographically dispersed than some of the competitors that are talking about the Q2, Q3 piece, may be the reason. For us, it's Q1 and Q4 and very little in Q2 and Q3.
Great. Thanks. Glenn, that wasn't a backhanded comment. It was just I think that maybe you still have an opportunity to do a little better. As you said, with a big store base, it's kind of difficult. Thanks.
Sure.
We'll go next to Randal Konik with Jefferies & Company.
Hey, can you hear me?
We can hear you, yeah.
Yeah.
All right, great. Yeah. Hey, guys. The story we've been trying to tell is the story of transformation and sustainability. When you think about the ability to obviously comp on comp and revenue acceleration after the company's been in a kind of flat revenue environment for about a decade, how do you tell the market out there how you believe in sustainability from a revenue growth perspective? How should we be thinking of that type of theme? Thanks.
Look, the reason I mentioned it on the opening comments is only because I think that was written about by most people, that that was a metric that analysts and some investors would be looking for coming off an impressive and strong Q1 in 2012. The fact that we backed that 4% comp up with a 2% comp is nothing that we're surprised about. It's something we plan to do. As Sabrina said in her comments, we are looking to have a business that comps. As I said at the investor conference, we are going to gain market share. Randy, it's a short question that could take a long time to answer, and it really adds up to all the different ingredients that I think we've put forward.
What I would say is that in 2010, which was a year that had not the consumer sentiment we're seeing in 2013, but it was coming out of the very difficult 2008, 2009. The business had a very nice comp, good top line, and had record operating margins. That was the beginning of what the business, with the talent we have, the strategies, and the hand we have to play. That was a really a turning moment for us. We start feeling the confidence and of course, the cotton events of 2011 happened. We got distracted, we had a good year in 2012. We look at it and go, "Okay, well, you can explain 2008, 2009." Most retailers struggled in those two years that have a bit of a heavy base rooted in the United States or in Canada.
2010, when conditions were slightly better, we did very well. 2011, I just explained. 2012, conditions were more normalized. We did well. Q1 2013, conditions are more normalized. We do well. I think that we're a team that's been to all of the different tests that you need to put a team through, whether that's macro test, restructuring test, bringing new people into an organization, embracing change, cultural or physical change as we've gone into China and other markets. This business and the leadership has proven to be incredibly resilient.
We're not trying to say that this is any prediction going forward, but I think 2012, now into 2013, as I mentioned, my consumer comments, we feel that the consumer is slightly getting better, and now it's up to people to look at, as Jennifer was saying, by going into our stores and seeing the product, that I think that the team is starting to put back to back to back performance together with a lot more opportunity to come. Back to Janet's question on the operating lever and the changes to operating model, which provide even greater efficiency and value to be unlocked. Look, we understand what we have to get done. It's a very competitive market.
There's a lot of people in our business, but our portfolio strategy that takes us from value to luxury in North America and our international growth opportunity, I think you put that together, and there's lots more we can do here at Gap Inc.
We have time for one more question. We'll go to Brian Tunick with J.P. Morgan.
I'll add my congrats as well. Guys, just curious if you've hindsighted or done any survey work regarding where did you lose your customer to over the last couple of years and sort of what are they telling you now regarding where they're coming from, and are you measuring both conversion and traffic to try to gauge how you're doing on that trend? Thanks very much.
Brian, we have more data than you can imagine here, but I think the best information we have is just we talk to existing customers. We have a very strong existing base who I think what the struggle with them when maybe our business was not as strong as you'd like it to be, was frequency. We had them coming in. It was just frequency. We have a strong base of lapsed customers. People who don't come in for an extended period of time, and we know how to speak to them and obviously get them back engaged in the brand. They still feel very strongly. This is just at a very high level, but any one of our brands, any lapsed customer felt good about the brand, didn't have a reason to come in for an extended period of time.
Now we're speaking to them more often in 2012 and continue in 2013. What I would say is back to the opportunities available to Gap Inc., are the number of new customers we need to get into our business. People who maybe have never experienced the brand, maybe they're just coming of that age when it makes sense, or we had a period of time where we were not as strong as we should've been, not as relevant, from a product, from a marketing, from a store perspective, and we just skipped a period of time where people were not coming in with the natural curiosity you get of mall shoppers. I think that that's the work I'm certainly encouraging our brand presidents is you got to strengthen your strengths with your loyal customers. There's an opportunity with lapsed.
I think some work has started on that front, now I'm very engaged with them on those new customers who we have more to offer, more to speak to them about. When we have focus groups, when we get new customers together and take them through our business, take them through our product, they get engaged. The response is definitely there. They know of the brand. It's just not a brand on their consideration list, and we need to be on everybody's consideration list. I think there's some good work going on that front, but more to come. I think it's just early days on the new customer front.
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 first quarter results, as well as the forward-looking statements included in Sabrina's remarks. As always, the IR team will be available after the call for further questions. Thank you.
Thank you. That does conclude our conference. You may now disconnect.