Ladies and gentlemen, Gap Inc. Chairman and CEO, Glenn Murphy. Thank you. Keep it down. I was going to introduce myself, but I'm Glenn Murphy, Chairman and CEO of Gap Inc. Welcome to Gap Inc.'s 35th annual meeting of shareholders. I'm joined this morning on the stage, as I've been fortunate enough for the last six years, by Sabrina Simmons, Executive Vice President, Chief Financial Officer, and Michelle Banks, Executive Vice President, General Counsel, and Secretary of the Corporation. She has a whole other title beyond that, but that's what I remember. Our Board of Directors are here this morning. The only person not in attendance is Doris Fisher, who is our Founder and Honorary Director. Doris, I know, like she does every year, is listening to the meeting today, but she is not in attendance. Our whole Board is here.
Bob Martin, who's our Lead Director and Chairman of Governance. We have Adrian Bellamy, who is our Chairman of the Comp Committee. Mayo Shattuck, who's our Chairman of the Audit and Finance Committee. Then we have a few other Fishers, even though Doris is not in attendance. We have Bob Fisher here and Bill Fisher. Then we have Bella Goren, Katherine Tsang, Domenico De Sole, and Jorge Montoya. Our senior management team is, for the most part, here in attendance. They're sitting in the front row. If they're needed, they'll be able to answer some questions later on, but they're in attendance, and they've been critical to the success of the business in 2012. The agenda for today is that Michelle's going to come up and take you through the formal part of the meeting. Sabrina will then present to our shareholders the financial results for 2012.
I'll come back up and talk about the business, the focus, and the priorities going forward. Before I bring Michelle up, I think that all of us can acknowledge the incredible tragedy yesterday in Moore, Oklahoma, in which over 50 people died, 20 children. Gap Inc., we continue to try to reach out to our employees. So far, we've found almost all of our employees, but we continue to try, and I'm sure at the end of the week, we'll be making a sizable donation to the efforts in Moore, Oklahoma. With all that said, Michelle?
Thank you, Glenn, for calling to order the annual meeting of the shareholders of Gap Inc. Good morning, welcome everyone. I'd like to ask you all to please turn off any cell phones or other electronic devices at this time. Today's meeting is being webcast, the webcast will be recorded and available on gapinc.com. Those on the webcast will be in listen-only mode. Those attending in person can find the rules of this meeting at the bottom of the distributed agenda. We're holding this meeting pursuant to notice mailed to all shareholders of record as of March 25th, 2013. As Glenn said, after the formal portion of the meeting, we will hear from Sabrina and Glenn, we'll answer questions from our shareholders. Please note there is a two-minute time limit for each person addressing this morning's meeting.
John Scheffler of Deloitte & Touche, our independent registered public accounting firm, is also available to ask shareholder questions as appropriate. Please note that only shareholders may ask questions at this meeting. We will now vote on the three proposals outlined in the proxy materials. The three items on the agenda are, one, the election as directors of the 10 nominees named in our proxy. two, the ratification of the selection of Deloitte & Touche LLP as our independent registered public accounting firm. Three, an advisory vote to approve the overall compensation of the company's named executive officers. We have executed affidavits of mailing of notice of the annual meeting of the shareholders of Gap Inc. These state that notice of the meeting has been mailed as required and outlined in the bylaws. The affidavits will be filed with the minutes of today's meeting.
Andrew Wilcox, on behalf of Broadridge Financial Solutions, is here and acting as our Inspector of Election for the meeting. Andrew tells me that a count of the shares represented by proxy shows that we have a quorum to conduct business at the meeting. Before we vote on the three proposals, are there any shareholders present who would like to vote in person by ballot or who would like to turn in or change their proxy? If so, please raise your hand, and we will assist you. If you have already submitted a proxy, you do not need to vote by ballot. Are there any hands? Okay, I see none. We will now proceed with the three items of business before the meeting. The first proposal is the election as directors of the 10 nominees named in our proxy statement.
The second proposal is the selection of Deloitte & Touche as our independent registered public accounting firm for the fiscal year ended February 1st, 2014. The third proposal is the advisory vote to approve the overall compensation of the company's named executive officers. The polls for the three proposals before this meeting are now open. Again, if you would like to vote by ballot, please raise your hand. The polls for each of the proposals before the meeting are now closed. Andrew, can you give me your preliminary report, please?
First voice message sent Friday, May 10.
I volunteer at my church.
The 10 nominees for director listed in the proxy statement have been elected. The selection of Deloitte & Touche as the company's independent registered public accounting firm has been ratified. The advisory vote to approve the overall compensation of the company's named executive officers has been approved. The final report of the Inspector of Elections will be filed with the minutes of the meeting. The vote results will be filed publicly on a Form 8-K. This concludes the formal portion of the meeting. The annual shareholders meeting is now adjourned. In a moment, we will hear from Sabrina and Glenn. Before I hand the meeting over to Sabrina to discuss company performance, I want to take this opportunity to discuss some administrative matters. The information in the remaining portion of today's meeting may contain forward-looking statements.
There are important factors that could cause our actual results to differ from these forward-looking statements. Information regarding factors that could cause our results to differ are set forth in our annual report on Form 10-K for the fiscal year ended February 2nd, 2013, which is available on gapinc.com. As a reminder for the shareholders attending the meeting in person, questions will be answered at the end of Glenn's presentation. Thank you. Sabrina, come on up.
Thanks, Michelle. Good morning, everyone. I'd like to begin by reviewing our 2012 performance. Then I'll discuss our goals for 2013. In 2012, we set forth four priorities. First, grow sales with healthy merchandise margins. Second, invest in our business while maintaining discipline. Third, grow earnings per share. Fourth, return excess cash to our shareholders. I'm very pleased that we delivered on all of our stated objectives. Here are the results. First, net sales grew by over $1.1 billion to $15.7 billion, with comparable sales up 5%. We achieved this while also improving our merchandise margins by two percentage points, driven by lower cost of goods and improved product acceptance across all of our brands. Second, we invested in talent, product, marketing, and store payroll, which contributed significantly to our results in North America.
In addition, we made investments to support our strategy of expanding through our channels and new geographies. We also acquired our newest brand, Intermix, at the end of the year. Even with these investments, we expanded our operating margin by 250 basis points to 12.4%. Further, we distributed $1.3 billion of cash to our shareholders through share repurchases and dividends. The bottom line was earnings per share growth of nearly 50% to $2.33. Let me now turn to 2013. We plan to use a balanced approach to deliver shareholder value in the upcoming year. Our first priority is growing sales with healthy merchandise margins. Our objective is to deliver a modest positive comp on a full year basis in our large existing base.
In addition to our comp base, we plan to drive increased revenue through our new brands, channels, and geographies, including Athleta, Intermix, Gap China, Old Navy Japan, franchise, and our global outlets. Managing our expenses prudently is another important goal. It's our intention to achieve operating expense leverage while continuing to invest in our strategic priorities, like our global growth initiatives and our omni-channel capabilities. With the balanced approach I've described, we're confident we have a path to expanding our operating margin and growing our earnings per share in fiscal 2013. We also remain committed to returning excess cash to shareholders through our share repurchase and dividend programs. As evidence of our commitment to return cash to shareholders, since 2004, we've utilized about $12 billion to repurchase over 600 million shares at an average price of $20 per share. This has resulted in a 50% reduction to our share count.
Over the same period, our dividend has grown nearly sevenfold from $0.09 to an expected $0.60 per share. In conclusion, we're proud of our track record not only over the last year, but also over the past five years, where we've delivered value by expanding our operating margin by over four percentage points and growing earnings per share at a 17% compound annual growth rate. As a result, our total shareholder return has exceeded the return of the S&P 500 by a meaningful amount over this five-year period. We feel confident that our long-term strategies will continue to deliver value going forward. Thank you very much, now I'll turn it back over to Glenn.
Okay, in the time we have remaining, what I'd like to do is do a little bit more of a forward-looking view in the company. Sabrina did a good job talking about what we talked about last year. That was the results she took you through. The business has to continue to move forward, has to evolve, and has to position itself to win in the marketplace. We've always been focused on what is the ultimate mission of Gap Inc. There's two parts to the mission. I'll take you through the first part now, and I'm going to end with the second part of what this company stands for. It begins with Gap Inc. being the world's favorite for American style. All of our employees know that, our store managers know that, and that's paramount to how we're going to win in the global marketplace.
What differentiates ourselves against our other global competitors is this notion of American style, and how we bring that to life across our multiple brands in multiple geographies and multiple channels. That's a big part of the company, it's at the core of how we're going to win globally. To take you back just a little bit, if you look at this chart, in 2007, we actually had a very decentralized, channel-centric organization. That was absolutely correct for 2007. Our outlet business was not global, our online business was not global. Franchise was only in two countries. What we did is we had specialized teams, some of the people who are here today, who focused specifically on taking our outlet business global, taking our online business that was only in one country, the U.S., global. Franchise grew from two countries to 40 countries.
We kept it central. It provides a little bit of complication inside the business, but at the end of the day, that was the right thing, knowing that the goal and the dream and the mission at the end of the day was to become the world's favorite for American style. Last year, the changes we made to our structure really set us up for the beginning of fiscal 2013. This is what this chart talks about. A single brand leader, whether that's Jack Calhoun at Banana Republic, Stephen Sunnucks at Gap brand, Stefan Larsson at Old Navy, who are all here today. They are in charge of the brand. The brand has become the centerpiece. They control the brand across all of these channels. They make the decisions on growth, on capital, on people.
Again, with the intention of taking these three globalized brands around the world to win customers and win market share. It was a significant change. It unlocks a lot of value for the company. It uncomplicates how we operate and allows these three business owners to focus their brands on growth going forward. That's what that chart talks about. With that change, what is the outcome and what is the change in terms of the operating model of Gap Inc.? This is the best way to demonstrate it to our shareholders. On the left-hand side, you have the global brands I talked about, the three of them. On the right-hand side, we have developing brands. Brands we have aspirations for, but also brands that are in categories and businesses that our three established iconic brands are not in. Athleta, Piperlime, and Intermix. We have high hope.
These are different businesses right now. The three iconic brands obviously are in a horizontal business in how they manage themselves. This allows us to look at different categories, different brands, and really bring a different opportunity for the company to win in North America. Is there a day where I come before our shareholders and one of these brands moves from developing over to global? I think that's a possibility. Most importantly today, with these two different streams, that business now sits on top of what I call the new Gap Inc. The new Gap Inc. is to bring world-class service, whether that's in supply chain, in IT, in real estate, using our scale, our leverage, our expertise.
Most importantly, one of the biggest changes that we talked about last October as the business made these changes, but were put in place this February, it also sits on top of an innovation center. That team led by Art Peck. The goal is to bring us new, innovative ideas on how do we position the business going forward. Of course, we need great product, which I will talk about later on. Innovative ideas, and we are at the epicenter of innovation, being 30 minutes north of Silicon Valley. Big opportunity for us, and Art Peck and his team are going to be working on this, and this is how our brands can access. The brands create the value, and Gap Inc. adds the value to their success. Let me just take a step back for a second. Let's look at the market in which we operate.
I do not think I have showed this slide at an annual meeting before. An investor meeting in April, a lot of people saw this. This is a $1.4 trillion market. The sector apparel is the second biggest consumer sector with the exception of the food business. $300 billion here in North America, slow, steady growth, and $1.1 billion in all other rest of the world countries, with a lot of those markets with strong growth. He is going to use, something I am happy to bring to our shareholders each and every year to give the report card as to whether our strategies are actually driving this kind of success going forward. Let's go to North America.
What I talked about earlier with the three developing brands, the way we are looking at our business in that $300 billion market, which really stretches, if you look at customers from a value segment to luxury. I mean, more and more in the last number of years, people mix and match. It is not uncommon to have somebody buy something from a luxury brand or a luxury retailer, also buy something from Old Navy or Gap Outlet or Banana Republic factory stores. Our formula for success to get more than 3.9% share in North America is to look at our business on this continuum of value all the way to luxury. In the value perspective, you have Old Navy, Gap Outlet, Banana Republic factory stores, as I mentioned. On the premium side, you have Gap brand, you have Banana Republic, you have Athleta.
On the luxury side, we have Piperlime and we have Intermix. That is really one of the formulas for success. We look at other competitors we have here or new ones who are coming into the United States from different markets. They do not have this lineup of unique, differentiated brands that can go out together, some ways be complementary to one another in order to be successful in the marketplace. The second part of our market share strategy is approaching this business through two dimensions. On the top, I think everybody who knows either our business or as a consumer or follows other companies, it starts with having consistent great product. You got to marry that with compelling marketing. Our brands own that. Three gentlemen I mentioned earlier, they own that part of the business, making sure that happens each and every day. Without it, there is no success.
The customer is changing and continues to change and continues to evolve. What we have to do in order to win, we need to marry that up with a second dimension, which is a seamless experience for our customers. Whether customers want to shop online, outlet, stores, have it delivered, want to pick it up in a store, want to buy it in a store and deliver it to their home. Whatever they want, we have to be much more accessible and seamless to them in the transaction. That's why the team I mentioned earlier, called GID, Growth, Innovation, and Digital, with the two key components of that being the innovation we can bring and the digital work we're doing currently in our business. That combination of those two dimensions are going to differentiate ourselves in the marketplace. We are working hard.
We're putting a lot of money in terms of talent and capital to make sure the second dimension becomes a competitive advantage for our business. At the end of the day, and all of you as shareholders know, whether you're in the consumer sector, no matter what part of the consumer sector, you have to ask, do you have a competitive advantage? The worst thing that can happen to any of our business is to become commoditized. You have to always have a unique offering, a point of differentiation, and something that I was taught a long time ago, either your competitors are unwilling or unable to do. That's what we're trying to build with this combination of these two dimensions in North America. Globally, I should take a quick look at this. I talked earlier that 25 basis points of share in the $1.1 trillion market.
This is the progress report that we as management team are presenting to our shareholders. I think most of you probably know these numbers, here's the progress from 2007 to 2012, all based on the number of countries. Gap clearly has a head start. With Gap, I think the latest report I heard from Stefan Larsson, who's here today, will be in 54 countries by the end of 2013. As Gap is making under Jack's leadership now, Banana Republic has always kind of been, as Jack and I talk about, in the shadows of Gap.
Now Banana Republic, with its new structure, can go out and get into as many countries, make the right investments, and bring that brand, which is really so sought after because work and how work is evolving, what you wear to work, the versatility of it is so critical to consumers around the world, and Banana Republic has that secret. Here comes Old Navy. Has been in two countries for about 15 years, and now we're into Japan. Huge opportunity for Old Navy to increase the number of countries in order for them to achieve their portion of being the world's favorite for American style. Outlet business from four countries into six. As I mentioned earlier, our online business was only in one country just four years ago, and now we're in 25 countries with own sites.
We control the sites in most countries in Europe, in Japan, in Canada, and in China. Let me end with this. I said there's two parts to the company's mission. This is the company's promise. The company's promise is foundational to what Gap Inc. stands for. This was handed down to us over 40 years ago from Don and Doris Fisher, our founders. We have always been about do more than sell clothes. That's what this company has always been about, and that's on so many different dimensions. When I look at it, for us, it starts with volunteering. Last year, the 130,000 employees who represent Gap Inc, over 65% of them volunteers, and those volunteer hours were 500,000. That's more than anybody else in our sector. It starts with the work our store managers and our employees do in their communities.
The work is phenomenal, the work they do with people in their communities around the world, not just here in North America. That's a key component of the business. If you look at our two big, Bobbi Silten's here today, who's the president of our foundation, the two big strategies for The Gap Foundation. I'm the chairman. The number 1 strategy is really working with underserved youth in our home markets. We've been a big part of major programs like This Way Ahead, Skills for America's Future. The company has put money and time in trying to do the work in those areas in order to help the markets and the communities in which we operate in. Lastly is working with women in developing countries. The signature program for that is our P.A.C.E. program.
By the end of this year, give or take, Bobbi, I believe 20,000 women will have gone through the training that our P.A.C.E. program brings to them in those countries. Foundational for this business. We are not going to waver from it. It's so important to our employees who come here and work for this business because they love fashion, they want to be successful, they're competitive. At the same time, this is what this business stands for and is all about. With that said, I do want to say we're not perfect. We're not the perfect company. It's complicated times, and there's a lot going on. As you think of issues that have come up recently, like Bangladesh, we were a business that went into Cambodia 15 years ago when that was not popular. We made a lot of investments. We worked with governments.
We worked with NGOs, and now there's a very strong apparel, commercial, economically strong business in Cambodia. Same goes for Vietnam. Same goes for Haiti. After the earthquake, President Clinton called us. We were the first company, and still one of the only companies, in Haiti manufacturing. Same with Lesotho. We understand in a global world in which we operate, there's always going to be unique challenges like Bangladesh, and the fire situation, and definitely the most recent building collapse is an absolute tragedy. We were not in that building. Regardless, it's an absolute tragedy, and that's the reason why we put forward a very comprehensive 4-point plan to make sure we can bring better conditions, more safety to all people who work in Bangladesh. Again, this is a difficult situation, and we are doing everything we can to make things better.
It is the reputation of this business. We have been leaders in this area. We will continue to lead going forward to make sure on all fronts, volunteering, community, underserved youth, women in developing countries are really paramount to what this business stands for. With that said, I want to thank you all for attending the meeting. I want to thank Sabrina, I want to thank Michelle, and of course, as we always do, I'm happy to take any questions from shareholders. I'm passing my sheet.
Thank you very much.
Yes.
My name is Kirsten Urgensmaller, and I'm here representing the United Food and Commercial Workers Union. We have 8,400 shares of Gap Inc. I'm just going to read the statement since I didn't write it, so can't be as dynamic as you are. I think it's important for people to hear it. Over the last four weeks, 1 million consumers have chastised Gap Inc. for not following the lead of its competitors by signing the Accord on Fire and Building Safety. Several U.S. senators have criticized Gap's response to the ongoing Bangladesh crisis. Thousands of media reports and demonstrators outside have cited the unwillingness of Gap to become a leader in Bangladesh safety and bring other companies along with them as a key reason why apparel workers in Bangladesh continue to die in industrial accidents on a regular basis.
Gap has earned a reputation in recent years as a responsible corporation. It's clear now that Gap management has misjudged the seriousness of this crisis, and the Gap brand is quickly becoming associated with the problems in Bangladesh. As shareholders, we're concerned about this reputational risk. Will you please share with us results of any studies you've conducted regarding potential damage to Gap's public image resulting from the growing crisis and your handling of the situation? If Gap comes to be associated with Bangladesh death traps, what damage will this have on shareholder value?
Well, I think that's a very good question, and it can have a very long answer, but let me try to give you some of the parts that management has been working on. As I said earlier, Bangladesh, no different than Cambodia a decade earlier, and Vietnam, and Haiti. They're all complicated situations, and every one needs to have a unique approach. What we've been doing is, first of all, the notion of an alliance, or in this case, the European Accord, of people coming together and trying to get a common way to solve and to bring value and to bring more safety and security for employees who work in factories in Bangladesh. We actually think that's the right path. I think that there's more value in people coming together than people all going into working with our Bangladeshi vendors. Of course, we don't own any factories.
We work through third-party vendors. In order to do that, it must be so much easier. We know this with our vendors, if there was a common approach. With that said, we have worked, I can't even begin to tell you in terms of shareholder time, incredible amount of hours trying to get to an accord that is right globally. We've been consistent in our approach, but there are some components of the European Accord that didn't make sense for us and didn't make sense for maybe some American other retailers. I can't speak for them. I can only speak for us. I'm going to come back to that in a second and just move.
In the meantime, since October of last year, we have been on the ground with a world-renowned fire safety inspector, and now that's been married up with a building engineer, and again, world-renowned, they're working shoulder to shoulder. We have every plan starting from last October, a year from that date, so by this October coming up, to have gotten to every single one of our factories. What's worth saying is there's 6,500 factories in Bangladesh. That's a lot of factories. We are in 73. We've been very targeted in the factories we went into. With that said, the only way we can provide safety and security from fire or, God forbid, any kind of building collapse, is to work through the people that we've hired, working with our vendors. We have an office in Bangladesh.
We have people in the field and going factory by factory and trying to make recommendations and changes. A big way to get that done is we went forward last October when we were unable Through huge efforts, I think everybody was well-intended on both sides to get to an accord that can work globally. What it didn't make sense for us, for a number of different reasons, this program I just talked about, we also put out $22 million of money, real money from Gap, to help our vendors either get secure loans at a decent price to pay for the repairs, or if for some reason during a repair, this factory would be shut down for a period of time and employees were left unable to work, we made money available to pay for them when they weren't working.
Those are principles at the core of this agreement we were trying to get to. The European agreement, again, we've spent more than anybody else. We are working directly with the authors of it, trying to explain to them we just needed some minor changes, because we agree with 90% of it. Some minor changes that allow a company like ours and hopefully other American retailers to join the Accord, and that wasn't possible. We are out there doing the work. We're doing every single day, as I said, we're through a lot of factories already, the 73. We'll get through all of them by next October, and we have no problem reporting back on as we're working with the government, what are we finding? How can people learn from this? Some retailers who sign the Accord are in 400-plus factories.
It's going to take a long time to get done. Do we wish there could be an alliance globally? Yes. Do we think it would just take the current Accord signed by Europeans to have a little bit of a change to accommodate American retailers? Yes. I don't think it's a big accommodation. At the end of the day, what I care about is the safety of employees, and at that core, we agree on that. Maybe will there be an Americord? Possibly. I think that I'll leave it this way with you. Stay tuned. We'll continue to do our work, but also behind the scenes, we're working to make sure that other companies, not just the Europeans and some selected Americans, find a way to bring real solutions to the situation in Bangladesh.
Not every factory has a problem, but the ones that do, we want to actually be there supporting and continue, as you said in your statement, to be the leaders because we have been leaders on this front for over 20-plus years, and we continue to do that because that's what we stand for, and we're never going to change that. Yes, ma'am.
Thank you. I'm here representing Amalgamated Bank, which owns 221 shares of Gap stock. Gap has publicly stated that it won't sign the Bangladesh safety Accord because it exposes the company and shareholders to too much liability. However, an op-ed in the "L.A. Times" last Friday written by highly respected legal scholars, it demonstrates that there's actually no rational basis to this argument. The law professors state that the Accord's costs are reasonable and quantifiable, and many major brands and retailers that have signed on, including two large U.S. corporations, PVH and Abercrombie & Fitch. It's not really just European companies, or it's not a European Accord. It hopes to be a global Accord. These companies, PVH and Abercrombie & Fitch, obviously consider these costs reasonable. Do you have any legitimate reason for not signing this agreement?
In the risk of becoming repetitive. It's 95% European, you're right. PVH and Abercrombie & Fitch have signed on to it. The other side of the accord is, though, it's with unions out of Europe. It's basically a European accord, but yes, there are a couple of Americans who signed onto it. This is much broader for us than just the legal issue. Sometimes these things get tied up in what one lawyer says in an op-ed in the "Los Angeles Times," versus another lawyer might say in some other op-ed. We've been through the agreement page by page for the last number of months. Again, beyond the legal issue, there's just dispute mechanisms that have to be figured out for us.
Yes, in the U.S., there's maybe a bigger legal risk than there is in Europe, which we have to take that into account for all shareholders in our business. If we were to sign on to something that had unlimited legal liability and risk, I think our shareholders should care about that. What I think was important, what I said earlier, is two points. One, if there could be a global accord with some very minor modifications, very minor modifications to the accord that is out there today, we'd be very interested in looking at that accord.
With that said, if there was an American version of the accord that really the framework of it is 90% the same, that tries to get real safety and security in building and in fire for people who work in factories in Bangladesh, that may turn out to be a good option, too, and solution. Regardless of that, we are working continuously, talking to everybody who's involved. We haven't given up on the fact that a global accord of some kind can be brought together. What's important to note, regardless, we have a team of experts. We've invested over $1 million so far.
We have $22 million of funds available to make sure we can go through the 73 factories in which we operate and try to work side by side with our vendors, with people of the local governments, in order to try to make this a much more secure situation than it's been the last number of years. We have a history in Cambodia, in Vietnam. It's not a perfect blueprint because, as I said earlier, we're not the perfect company. This is not a moment for us to beat our chest. There's serious situations that can arise at times in a global supply chain. We take those seriously because of what the company believes in and stands for.
You have my commitment as a shareholder that we continue to work in trying to find the right solution that is good for this company, good for the people, mostly of Bangladesh, who work in those factories, who make clothes for companies around the world. We are committed to getting that done. As I said earlier, I think you should stay tuned because there is more to come forward on this issue in the next number of weeks. Are there any other questions? With that said, I want to thank everybody for attending today. Thank you for your support of Gap Inc. I look forward to seeing all of you next year at our annual meeting. Thank you.