I would now like to introduce your host, Katrina O'Connell, Vice President of Investor Relations.
Good afternoon, everyone. Welcome to Gap Inc. Q1 2013 earnings conference call. For those of you participating in the webcast, please turn to slides 23. 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 we're required to reconcile to GAAP Financial Measures, please refer to today's press release as well as our most recent Annual Report on Form 10 ks, which is available on gapinc.com. These forward looking statements are based on information as of May 23, 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 Q1 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 5 plus years in a very challenging environment. And this is the Q1 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. So 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 a 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, but I think our teams came out very strongly in this Q1.
And I think it's nice to see across all of our businesses good 2 year comp performance in our 3 key brands. Now to me the big driver of that continues to be our product. We continue to have good product momentum. Now 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 going to dominate and where we're going to differentiate in each one of our categories that builds up to a comp. So when I look at the quarter and I look at the categories that 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 going to differentiate ourselves against our competitors. And lastly, in the quarter, just one more number I want to 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. So 27%, while the majority of that base is in the United States, we are seeing really strong growth in Canada, Europe, China and now in Japan. So let me just pivot for a second and talk about our strategic initiatives.
First and foremost, it's about growth, how the company is going to 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 going to 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. And I was just in China to see the 5th 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 from when they're prepared and the consumer and the environment is just right for us in China. So I think everything there is all systems go. Old Navy Japan, we opened 9 stores in Q1.
So unlike most real estate, it's been my experience in the years I've been doing this, real estate tends to be back end loaded. So I was very proud of the team that they opened so many stores up in the Q1. And I'm going to be going there at the end of June, but from all intents and purposes, look 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 Athlatt openings are on track. They are absolutely executing as we would expect in these 2 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, but the launch has been smooth.
The store execution has been great. So 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 a net of stock online, the majority of our customers when they see a net 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. So 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 omnichannel.
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 it's 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 Q1. It's nice to get off to a good start. The 1st week of every month, the 1st month of every quarter and the Q1 of every year are very important.
So it's good that we got off to a good start in this Q1 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 Q1 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 4 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 $135,000,000 or 34 percent and operating margin expanded by 2.90 basis points to 14.2%. Net earnings were up $100,000,000 or 43%. Turning to slide 5, sales performance. 1st quarter total sales were $3,700,000,000 up 7% with comp sales up 2%. Total sales and comps by division are listed in our press release.
Of the 5 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 Q1 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 $45,000,000 in the Q1. This translation impact was primarily due to the weakening of the Japanese yen versus the U. S.
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 6, gross profit. Gross profit dollars grew by 12% to $2,500,000,000 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 7 for operating expenses. 1st quarter total operating expenses were $1,000,000,000 up $34,000,000 from the prior year. Marketing expenses grew modestly by $4,000,000 to $143,000,000 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 $333,000,000 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 Q1. About $18,000,000 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 8.
Inventory dollars per store were up 3% broadly in line with our comp sales growth. The plus 3% is on last year's 7% decrease in inventory dollars per store. For the quarter, free cash flow was an inflow of $205,000,000 roughly equal to last year. We ended with about $1,600,000,000 in cash and we distributed $128,000,000 through share repurchases and dividends. Our quarter end share count was 466,000,000 Please turn to slide 9 for capital expenditures and store count.
1st quarter capital expenditures were 151,000,000 dollars 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. And 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 and we are reaffirming our full year earnings per share guidance of $2.52 to $2.60 To be helpful, there are 2 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. 2nd, as we've noted 2nd, as we've noted several times, the Q4 this year has one less selling week than the Q4 last year. Additionally, the Q4 of 2013 drops a large fall selling week. Therefore, just as the first quarter benefited from the calendar shift, the 4th 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 $675,000,000 and depreciation and amortization to be about $475,000,000 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. And 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 1 per person.
Yes, thank you. And we'll go first to John Morris, BMO.
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.
John, I'd say there's really 2 parts that we talked about in April. So just from a terminology perspective, it's a seamless inventory. And the idea behind that, 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 and that when 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 how do we and 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. And then 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. And then when it gets inside of that distribution center, how do we make sure it's seamless between the online channel and the stores. So 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 needs 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 then you can do you can be a lot quicker on basic inventory and seasonal basic inventory to get a read and respond. And we've done some of this, so there's some of that going on in the company today. But I guess if I was to characterize it, if we'll be considered to be world class, we are probably in the second inning from being 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 response to supply chain will happen in 2014.
Clint, are those potentially contributed in the 100 of basis points over time, just order magnitude benefit?
It's tough to quantify. All we 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. And 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. So 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.
But it certainly doesn't explain the whole delta of 400 basis point or 500 basis point difference between ourselves and the leading company in our sector. But 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. So 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.
Your next question comes from the line of Kimberly Greenberger with Morgan Stanley.
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?
And over the next sort of year or 2, do you think you 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?
Yes. I guess there's 2 parts. So if I focus exclusively on average unit cost, the opportunity clearly for us is to use less fabrics in the business and have people 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 5 years ago. So 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 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.
But 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. So 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 5 years ago, I'm just happy we still have lots of opportunities to improve the business from 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.
And the company has always had lots of priorities. The great thing about Gap Inc. Is we're rich with opportunities. And this is just one we talked about before that I believe we can do a lot more with this and our vendors agree and I was reason I know this I was with all of them. I spent 10 days in March in Korea and China and India.
So speaking to them about how much more we can do, explain to them our plan, trying to quantify the value of that. So 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 3 opportunities we spoke about our investor me and Napra. I apologize same with the phone who wasn't there.
But 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. And then as the 2 I just talked to John. So ranking them is difficult. I think all 3 have contribution and value to be unlocked between the 3 of them. And the only thing I would add to it is not much difference between the 3.
So there isn't that one is worth a lot and the other one is just a marketing term that we're using and because we want to look like we have opportunities. All three have opportunities and value to be unlocked and I 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 earnings incremental earnings for the company. So we're fortunate to have all three of those opportunities available to us.
Great. Thank you. We'll go next to Matt McClintock with Barclays.
Hi, good afternoon and congratulations on out comping the comp. So essentially I have one question. You talked about 27% online growth and that really is outstanding, particularly given the size of the overall business. And 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 omnichannel investments that you've been making relative to maybe more traditional e commerce traffic and growth drivers?
And then you also touched upon China e commerce growth in other regions. How does your omnichannel capabilities 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. But just as a reminder, on all of our sales in the Q1, including our online sales, and we are really proud of the underlying growth, but it definitely benefited from the calendar shift. So we've talked quite a bit and I said it again that this Q1 dropped off a small February and added to May. So all of our sales including online benefited from that. And now I'll turn it over to Glenn.
The other thing I'd add to that Matt is while I think it's easy to go to the omnichannel number. So the omnichannel initiative then point to the online number. And there's some truth to that. It's still early days for us. And I'm not going to 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, and that continued in this quarter. I think when we think about it, when we're going to figure out how to help you and the other people on the phone identify the value of omni channel, But 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 actually go than starts in the store. Then 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.
So 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 4 wall contribution. So 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 put together when can the North American components of the omni channel make their way internationally. North American components of the omnichannel make their way internationally.
Certainly in a market like Japan and China that would be leading edge. I think a lot of the omnichannel work and I travel around world a lot seems to be coming out of North America and particularly 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 some of these they're already advanced in some of these areas not necessarily in our sector but in some other sectors.
So I think that the sooner we can get some parts of our omni channel total package into the European business I think that will help our European brands compete and also allow them to gain some market share.
And we'll go next to Oliver Chen with Citi.
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.
And secondly, could you comment on looking forward for Old Navy on some of the comp last year was driven more by units. And what do you think about going forward for the opportunity to comp there on the unit versus a UR side? Thank you.
Well, look, we don't have more of a crystal ball than anybody else. And what I try to quantify on the phone is that the environment is never going to go back to the way it was in 2,006 and 2,007 at least we don't see that anytime soon, we wish. But I did find this Q1 and we have our own research we do. Obviously, we talk to customers a lot. We get feedback.
And 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 401s. I think all those things are positive signs. And so we're certainly not predicting that the consumer sentiment levels that were in place 6 or 7 years ago are going to return anytime soon. But we don't we look at a number of different metrics, but one that I'm particularly as I've studied it for a long time a fan of is the Reuters University of Michigan survey that comes out and I think that consumer sentiment has been moving nicely in the right direction for the last 12 months. It's still a long way from its peak, but I think we're comforted by the direction it's taken.
And so I think that that's good news.
Yes. And on the Old Navy piece, Oliver, it's a good point last year when we were lapping 20 eleven'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 2012. So a lot of our comp was driven by that reinfusion of units, but really just to get it back to a normalized level. So 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.
So 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. Good morning.
Thank you.
We'll go next to Janet Kloppenburg with JJK Research.
Hi, everybody. Congratulations on a great quarter and 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 Q2 versus last year? And 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 Q1?
And if we could expect any change there in light of how you're feeling about the consumer confidence? Thank you.
Yes. So with regard to AUC, Janet, what we did say was that the Q1 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. And from this point forward, the AUC is really sort of a non issue. So, the delta in AUC in the remaining quarters is not a meaningful change from the prior year. And then I'll just start off on your promotion question and let Glenn finish.
Certainly, this year and it's been well documented on all the earnings calls before us. Certainly, this year versus last year, given the weather patterns in February March, this year was less favorable for retailers overall in general, just given those weather patterns. So for the quarter, across the board, we were probably more promotional than we were in 2012. But that said, I think we're very pleased and you can see it in our merch margin performance and our overall performance. We're pleased with how the teams manage those promotions very surgically.
So we were still able to deliver on our goal of getting that comp up with nice margins.
And when we think of the 2 brands that you mentioned, Jen, look, at the end of the day, Old Navy is a brand of the value sector. So 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 consumer gets confused.
But 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 Stephane and his team are doing the right thing. And as long as for Old Navy to me it's always the voice. It has a personality. And if they're just going to be 40 percent off of Memorial Day weekend that I expect more from Old Navy to really come out and present its story and what the brand stands for. So 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.
A GAAP while I completely agree with what Sabrina said in the Q1, 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 and sorry in New York, in Toronto, in Chicago.
So 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 of Gap. I mean that's an iconic brand. And yes, you need to talk about your value proposition. And that doesn't mean they're going to be void of promotions.
That's just the world in which we operate. But I think that I would expect as long as those 3 other components I spoke about earlier continue to strengthen and get better that their need as their brand health and the 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 we've made in the past and find a better balance.
Thank you.
And we'll go next to Adrienne Tennant with Janney Capital Markets.
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?
And then for Sabrina, a clarification question. The $2.52 to $2.60 does that exclude the $0.04 benefit? And when you said that it comes out of the Q4, is that the $0.08 shift? Thank you.
So why don't I start with both of them quickly and then Glenn can follow-up. On the units, just to be clear, our unit our goal, Adrianne, is as we're driving comp is to balance units with AUR. So I will tell you unit sales across the board for Gap Inc. Were up. So I don't want to leave you with the impression that we're pulling units out of Gap brand.
That's not true. We're actually marching to that same balance. So we are increasing units at Gap Inc. Across the board and no brand is a standout in that. So everybody is kind of up and managing their AUR.
With regard to the guidance, so the way to think about that is there's 0.04 of tax benefit, 0.02 $0.02 are in the rate and the rate piece is really just a timing difference because the full year rate is still $0.39 But the $0.02 that came into interest, that is a one time benefit that does flow through. But the range is an $0.08 range and there's lots of pluses and minuses. So 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. So with the yen moving, I kind of think of them together like one is going up, the other one is hurting us.
We'll see the degree to which it does. Does that answer your question, Ann?
That's super helpful. That absolutely answered it. Thank you very much.
And we'll go next to Ike Boruchow with Surney AG.
Hi, thanks for taking my question. 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. But just when you look out for the remainder of the year by brand where do you see the most investment?
And are you doing 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. But we've I think Experian 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. Mostly it's Gap brand where we put some money out of home and focus 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. We saw some benefit from the Be Bright campaign and that was resonating with people. So 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. Is a portfolio owner of 6 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 and Viner Republic and our other brands stand for, what differentiates them, how are they going to win. So 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. But the money and the investment, I'm actually I don't see a need to put much more money into the brands.
Some of the brand presidents want to make their own decisions and we will guide them and we will advise them, but 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 through the right channels? Are they putting them through the right Are they putting them through 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. And there are 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. But so far no need for more money. And 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. But right now, I don't see much different from 2013 in terms of the playbook besides the the creative is going to be different, the story is going to be different.
Yes. And just to be a little helpful, Q1 was up $4,000,000 Q2 as Glenn said in spirit, there's no huge changes planned, but we're certainly not planning on bringing it down in Q2. So directionally, he was talking about Q1 and
Q2. Thanks.
And 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?
Yes. So on the leverage, Lorraine, because about half of our total expense base is related to stores and over that 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. So 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. So we sort of reverse engineered it, if you will, to make sure we can deliver that. And with regard to the margin rate, we 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, etcetera, we are always looking to improve our profile with regard to regular price selling, the depth of our promotions, the depth of our markdowns.
So that's obviously a very important lever. And 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.
And we'll go next to Jennifer Tavis with Lazard Capital Markets.
Hey, guys. Good afternoon. Gwen, 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. And then Sabrina, thanks for the clarification around the calendar shift. That was really helpful. Just wondering how we should think about the Q2 and the Q3.
I know the shift won't be as big, but will you see a little shift between there? Thanks.
Well, 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 the store and the conditions and the standards, the service can be below our expectations. What I will tell you is that 2 things. 1, we started to put more money back into our business in last year's P and L as we became a little more comfortable with product and as the teams decided that there was a service model yes, customer service model opportunity. What 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 we can actually get a return for that investment.
So they've been much more thoughtful on what stores where's the investment needed to go. So Banana Republic's case the return is in the fitting room. In Old Navy's case we put more labor and 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. So we understand our brands very well.
We know what our customers want and we know where labor at times needs to go because we have either tested or we just understand our business well enough what kind of return we can get. I'm disappointed obviously you're telling me in a backhanded way as you've been to some stores lately and I'd like the product but didn't like either the conditions of the store or the service level and maybe we can tell Katrina where that was and we're happy to look into it because we want to run a good business every single day and 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. And 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. And I know our field leaders understand that. So I think the money is there and maybe that was just poor execution which is not acceptable for the way we look at our business.
Yes. And then with regard to Q2 and Q3, our biggest notable shift 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 maybe that unlike some of our competitors, we have 6 brands, many of which don't play in back to school. Obviously, Old Navy does, they're the biggest and Gap some too.
But I think with the 6 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. So for us, it's Q1 and Q4 and very little in Q2 and Q3.
Great. Thanks. And Glenn, that wasn't a backhanded comment. It was just, I think that maybe you still have an opportunity to do a little better. But as you said with a big store base it's kind of difficult.
Thanks.
Sure. And we'll go next to Randy Konik with Jefferies and Company.
Hey, can you hear me?
We can hear you, yes.
Yes. Hi,
good. Yes, hey, guys. So the story we've been trying to tell is the story of transformation and sustainability. So when you think about the ability to obviously comp on top of 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 of from a revenue growth perspective? How should we be thinking of that type of theme?
Thanks.
Well, 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. So the fact that we packed that 4% comp up with a 2% comp is nothing that we're surprised about. It's something we plan to do and as Sabrina said in her comments, we are looking to have a business that comps. And as I said at the investor conference, we are going to gain market share. And Randy, it's a short question that could take a long, long time to answer.
And it really adds up to all the different ingredients that I think we put forward. But 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 2,008, 2,000 9. The business had a very nice comp, good top line and had record operating margins. And that was the beginning of what the business, what 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 and then we had a good year in 2012. So we look at it and go, okay, well you can explain 2,008, 2,000 and 9, most retailers struggled in those 2 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. So I think that we're a team that's been through all of the different tests that you need to put a team through whether that's macro tests, restructuring tests, 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. So we're not trying to say that this is any prediction going forward. But I think 2012 now into 2013 as I mentioned by 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. So 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.
And we have time for one more question. We'll go to Brian Tuncay with JPMorgan.
Congrats as well. Guys, just curious if you've hindsight it 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 it's I think the best information we have is just we talk to existing customers. We have a very strong existing base who I think with the struggle with them when maybe our business was not as strong as it likely to be was frequency. We had them coming in was just frequency. Then 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 engage 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 for a reason find 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 20 13. What I would say is back to the opportunities available to Gap Bank are the number of new customers we need to get into our business.
And 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 have been, not as relevant 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 from mall shoppers. So 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 in that front and now I'm very engaged with them on those new customers who we have more to offer, more to speak to them about and 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. I mean 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. So 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. And as a reminder, our earnings press release, which is available on gapinc.com contains a full recap of our Q1 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.