I would now like to introduce your host, Katrina O'Connell, Vice President of Investor Relations. Good afternoon, everyone. Welcome to Gap Inc. Q1 2012 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 and our most recent Quarterly Report on Form 10 Q, all of which are available on gapinc.com. These forward looking statements are based on information as of May 17, 2012, 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. Before I hand it over to Sabrina to take you through the highlights from the Q1, I've got some general comments about Q1. First off, as I said in the release, we were pleased with our performance in the Q1. I think domestically in particular, if you look at our comp performance in each one of our large brands Old Navy, Gap and Banana Republic, we were pleased with that performance. And our product teams really stepped up in the Q1.
We've been pretty consistent since our call in February saying that last fall, we sat down as a business and took some corrective measures in product and that's some of the areas we're making investments in which I will touch on at the end of these comments. I think color was a trend that everybody took advantage of. I think our team did a very good job with that. In general, our product teams really stepped up nicely in this Q1. We also had some great feedback from our customers on our collaboration with Diane Von Furstenberg at Gap Brand, doing DVF for kids, traffic driver, great execution in the stores and marketing and I think that was very good for Gap Brand.
And for Banana Republic to tie itself in a partnership with Mad Men, one of the top properties, definitely here in the United States was very good for their business. Again, a lot of customer increase, great sell through in the product and amazing feedback. And lastly, our online business continued to be very strong coming off of a 20% increase in 2011. Our online business delivered an 18% increase in the Q1. And we're making a lot of smart investments in mobile technology, online media and a whole bunch of different areas because that's part of our business that we're known for.
We have in my opinion a competitive advantage and we continue to invest to make sure that we're actually out there gaining market share in the online business. Let me switch gears and talk about our growth initiatives and their performance and just highlight a few of them in the Q1. Our franchise business added 3 new markets in the Q1 and more importantly they added 22 stores. That was really strong performance by that team. Our China business added 7 new stores and a new market in Wuhan and the China business is on track to doing the 30 stores we committed to get done in 2012 and good performance coming out of that team.
I happen to be in Japan 4 weeks ago and saw the store coming together for Old Navy in a market just outside of Tokyo, beautiful store, great pre marketing, good brand awareness for Old Navy, good initial feedback from customers. So we're very much looking forward to that opening, which will be later this quarter. And that's led us clearly on track to add 25 stores. We like the performance of the stores from 2011 we're seeing so far in 2012. The marketing platform I talked about in the February conference call.
So that's coming together nicely. We're looking forward to reporting on even more progress when it comes to the real estate strategy for Athleta. We talked on the February call about investments. I just thought I'd spend a minute on that. Two areas in particular investments in our product and investments in marketing.
On the product front, our creative advisors are working very well with the design teams at Gap Brand with Tracy Gardner and Old Navy with Jill Stanton. Now their work in working alongside of the design teams in each one of those brands won't be seen until holiday, but very good feedback on the contribution they're making so far. Now more importantly, in the Q1, there were some key categories that we already put some investment into for our customers to notice and for us to get a much higher sell through inside of our stores. So just a couple of examples. Old Navy completely redesigned their full T shirt business and that launched in the Q1 and was quite a contributor to Old Navy's performance in Q1.
And Gap brand put money into their bottoms business and their performance on colored bottoms and colored denim. That was also a big contributor to their performance in the Q1. So as I mentioned before, we're looking at key categories where we can have a competitive point of differentiation. We will make targeted investments in order to drive our business. On the marketing front, we did come into the New Year with for the most part 5 new creative platforms.
Now Old Navy's was tweaked from November of 2011, but for the most part 5 new creative platforms. The Gap platform, which I assume everybody has seen, it was a global campaign was Be Bright. And that campaign very well received from customers, good execution in the windows, in store, digital execution, strong. Felt very good about what the team did and the reaction we got from customers and in the overall performance of the business. And I really thought that Banana Republic did a very nice job in the Q1 on their marketing platform, which is focused on new work.
That's just perfect for that brand. And I thought the mediums they used to express that creativity mostly on direct mail really came across strongly and got great feedback from their customers. Last month, we announced the hiring of Stephan Larson from H and M to become the new Global Brand President for Old Navy. Now Stephan won't be joining us till the month of October, but everybody here is very excited about what he's going to bring to the business. He's had this phenomenal experience in product, in real estate, in sourcing and inventory management.
But most importantly, he's a very global executive. Old Navy's number one priority is to continue this kind of performance in its domestic business. But with the opening of the store in Japan and future openings in 2013, 2013, Stephane's experience globally will be very helpful to where Old Navy is at this point of the revolution. So in closing, it's nice to get off to a good start doing $0.47 in EPS, having nice comp performance in the Q1, 6% total growth. All the numbers that you see in the press release, we feel a bit about that.
But as we've said many times, we have lots of work to do inside the business. While it's nice to celebrate this small win in the Q1, it's a long year. We have lots of initiatives in place. We need to execute them. But we're committed to making that happen.
So with all that said, let me pass on to Sabrina who will take you through the financial highlights for the Q1. Spreena?
Thank you, Glenn. Good afternoon, everyone. We're pleased with our Q1 performance as it represents meaningful progress against our 2012 priorities, including improving sales, reinvesting in our business and growing earnings per share. Here are some highlights for the quarter. Net sales were up 6%.
Comparable sales were up 4% and all North American divisions posted positive comps for the quarter. Despite increased average unit costs, gross margins were only down 20 basis points. And finally, our earnings per share grew 18%. Please turn to Slide 4 for our earnings recap. In the Q1, operating income was up $9,000,000 or 2%.
Net earnings were flat at $233,000,000 and earnings per share were $0.47 up from $0.40 last year. This includes about a penny of benefit related to favorable reassessments of tax positions in the quarter. Turning to Slide 5, sales performance. 1st quarter $400,000,000 First quarter gross margin was down 20 basis points to 39.4 percent. While average unit retail continued to be up over last year, our merchandise margins were down 100 and 50 basis points driven by higher average unit costs.
Rented occupancy leveraged 130 basis points. As a reminder, the amount of leverage in any given quarter is dependent on a number of factors. Some examples include the timing of store openings and closures, landlord settlements and rent escalation dates. Therefore, although we remain confident that we will leverage rent and occupancy on a positive comp, we would caution against extrapolating this magnitude of leverage. Turning to inventory on Slide 7.
As mentioned in our April sales press release, inventory per store in terms of dollars was down 7% on last year's up 10%. Please turn to Slide 8 for operating expenses. We noted on last quarter's call that we plan to invest more in our domestic businesses in 2012 and highlighted that it's unlikely we will leverage operating expenses. In light of that framework, Q1 total operating expenses were $980,000,000 up $62,000,000 from the prior year, due primarily to investments in marketing and store payroll. As a percent of sales, total expenses deleveraged by 20 basis points.
Marketing expenses grew $20,000,000 to $139,000,000 driven by increases in CRM and Gap brand marketing. Please turn to Slide 9 for capital expenditures and store count. 1st quarter capital expenditures were $148,000,000 With regard to company operated stores, we closed 10 stores on a net basis and ended the quarter with 3,026 stores. Net square footage was down 2% compared to Q1 2011. Store count and square footage by division are listed in our press release.
Regarding cash and share count on Slide 10. For the quarter, free cash flow was an inflow of $216,000,000 compared with an inflow of $104,000,000 last year. We ended the Q1 with about $2,000,000,000 in cash and short term investments. On our Q4 earnings call, we announced a new $1,000,000,000 share repurchase authorization and guided that our level of share repurchase in 2012 would be less than 2011. Consistent with that statement, our Q1 share repurchases were minimal and we ended the quarter with 491,000,000 shares outstanding.
And now I'd like to discuss our outlook for the rest of the Please turn to Slide 11. We're certainly pleased with our progress as reflected in our Q1 performance. That said, there are several factors to consider regarding our full year outlook. First, as I just noted, share repurchases were minimal during the quarter and therefore our weighted average share count was impacted not only for the Q1, but likely for the full year. 2nd, external factors including weather were very favorable in the Q1.
And finally, we believe it's important to remain measured in our outlook given that our biggest selling seasons are still ahead of us. Taking these important factors into account, we are raising our estimate for full year earnings per share, which includes the 53rd week to $1.78 to 1.83 dollars As a reminder, our framework for the year, while unchanged from Q4 includes the following. It's our objective to continue to drive modest top line growth through the stabilization of our base business and a continuation of our global growth initiatives. At the same time, we plan to deliver healthy merchandise margins through better product acceptance, inventory discipline and improved average unit costs. While we're confident that our average unit costs on like for like product will improve in the second half of twenty twelve, as we noted on our last earnings call, this benefit will be partially offset by select reinvestments into product quality as well as changes in the mix of our product assortments.
With regard to occupancy costs, we continue to expect leverage on positive comps. But as I just mentioned, we would caution against extrapolating the magnitude of leverage in the Q1. Moving on to operating expenses. We expect to continue to prudently invest more in our domestic businesses and our growth initiatives. Therefore, we do not expect operating expense leverage for the full year.
In addition to continued international growth, areas of investment this year include Global IT, e commerce, store payroll and marketing. Specifically, we expect the increase in marketing in the second quarter to be at least as large as it was in the Q1. With regard to inventory, at the end of Q2 inventory dollars per store are expected to be relatively flat to last year. Regarding share repurchases, our philosophy regarding the distribution of excess cash to shareholders has not changed. However, as a reminder, our approach to share repurchases is highly opportunistic.
Given that we repurchased over 200,000,000 shares in 20 10 2011 at an average price of $19.60 We are comfortable with a slower pace of repurchase in 2012. The following full year guidance metrics remain substantially unchanged. Operating margin about 10%, net square footage down by about 1 percent company operated stores about 130 openings and about 115 closures, both of which are net of reposition capital expenditures about $600,000,000 depreciation and amortization about $475,000,000 effective tax rate about 39.5%. In closing, we're pleased with how we are delivering on our goals for the remainder of the year. Thank you.
Now I'll turn it back over to Katrina.
Thank you, Sabrina. That concludes our prepared remarks. Now we'll open up the call to questions. Just a reminder, we'd appreciate limiting your questions to 1 per person. Thank you.
Our first question comes from the line of Kimberly Greenberger with Morgan Stanley.
Great. Thank you. And congratulations on a really terrific start to the year here. Glenn and Sabrina, I wanted to just ask about the outlook here for the rest of the year. We saw just an incredibly good Q1.
It sounds like there's a little more caution as you look out to the second, third, Q4 of the year. Is this just trying to maintain expectations as and let the results kind of speak for themselves? Or are there some benefits perhaps in the Q1 that you're worried won't repeat in the rest of the year? We're just trying to square the great performance we saw so far this year with what seems to be a more conservative outlook for the rest of the year? Thanks.
Yes. Great question, Kimberly. So I guess I'm going to start by saying that we actually feel really confident internally about the progress we're making. So I think that's important headline. That said, we are only finishing here the Q1 and entering the 2nd.
So as I said in my remarks, we have 3 big important quarters ahead of us. So we really want to just remain measured in our outlook. In addition to that, I'm just going to do 3 quick reminders on themes that we outlined since the Q4 earnings call that are still true, which is although we feel good about our average unit costing in the back half, we are reinvesting some of that into quality and assortment mix decisions that obviously we feel good about. But it's the AUR piece that will need to play out as the year goes on. On.
So that's something we'd like to do after 4 years of really, really tight expense discipline. And then finally, and this is a really important point. As I said, we are committed to distributing excess cash, but we've always been very opportunistic about our program. And so I think it's going to be really important to take into account the fact that the share repurchases in the first quarter were minimal. And that is going to really impact sort of how everyone models out their weighted average shares.
Obviously, the more back half weighted share repurchase becomes, the less impact it's going to have on the share count for the year.
Great. Thank you so much.
Your next question comes from Adrienne Tennant with Janney Capital Markets.
Good afternoon. And let me add
my congratulations. Glenn or Sabrina, can you talk about your average unit cost trajectory? You probably have bought well through Q3 and into holiday. The fall was up 20%. So can you give us any color as to do you get half of that back?
Do you reinvest half? Any sort of color there would be very helpful. And then kind of on the same path, really the same question is inventory unit plans? Thank you. Yes.
So I'll start that Adrienne. And last year just to be clear, not fall wasn't at 20%. We said our entire back half was up about 20% and that included holiday, which was actually the peak costing was in holiday last year. So that's just a nuance that I just wanted to sure we're grounded on. With regards to this year, you're right.
We're not done with the second half. We're not done with holiday yet. But we feel good about our costing. We're not going to quantify this year. It was highly unusual for us to ever do that.
Last year, we did that because the escalation was so unprecedented and meaningful to our P and L. So we're not going to get into precise numbers, but again, we do feel good about that, which is why we said we feel confident about healthier margins this year. But we will be assets to the brands like at Banana Republic, denim at Gap brand, etcetera. And then there's important mix shift. So a good example of that would be investing in more Gap fit, the athletic pants, putting it in more stores.
And that's a higher AUC than things like panties that it might be replacing. So those are examples directionally of where we're headed. Just directionally units, would they be up? Thanks. And then on units, as the pressure on AUC eases, it will depend on divisions.
But I'm going to use Old Navy as an example. Since they had the deepest escalation last year, we pulled back the most units out of Old Navy and that's a value business. So of course, we'd like to get to a more normalized level of kind of units per store there. We're going to watch our total inventory dollars, but as AUC comes down, we would like to add more units there, yes. Okay.
So up year on year. Thank you. Your next question comes from the line of Jon Morris with BMO Capital Markets.
My congratulations too here on the real nice start to spring. Inventory, Sabrina, if you could talk a little bit about kind of where that came in. It looks like maybe it was a little bit below where you were. Are you chasing? How do you feel about it?
What are your thoughts on a go forward basis? And then I think maybe for Glenn talking a little bit about the product both at Gap Domestic and also at Old Navy. At Gap Domestic, we're hearing a lot of good things about the bottoms business. Can you talk to us a little bit about the tops, what you're seeing there at Gap Domestic and Old Navy? A little bit about where that strength is coming from in terms of the product?
Thanks.
So I'll start quickly on inventory. Just color the context is we were up 10% last year, so down 7% this year. So overall on 2 year basis, we feel like that's a good place. As we enter Q2, we had a nice Q1. If we had to call out any one division, I'd say maybe we're a little bit lean at Old Navy, but we have healthy receipts coming in.
We feel good about inventory overall and we guided to flat dollars per store at the end of the quarter.
And John on the product without getting into too much detail, what I would say about Gap, it's multifaceted that we continue to be very pleased with our kids and baby business and some of the investments that Spreena was talking about earlier on product that can be definitely seen as you get into spring, summer and beyond in our baby business, which is clearly a competitive advantage and an asset for the company. So I'd say that business continue to be strong. Spirena referenced the body business led by the new Gap Body Fit business that was strong in the quarter. So but bottoms was likely very easy for people to start asking that question. Our whole campaign in spring under the Be Bright platform was about bottoms, whether it was woven bottoms and twill or whether it was the denim, which we did in March.
So that was a good business for everybody at Gap and at Old Navy as well. So I'd say Gap was fairly nicely spread across all of their different businesses. It wasn't strictly a 5 comp on the quarter led by colored bottoms in women's. That business did well for us as I'm sure did well for a lot of other retailers, but it was really spread nicely across the business, which is encouraging because you don't want to have a 1 dimensional driven comp. At Old Navy, I talked earlier in my opening comments about the relaunch of their tea program.
There was a nice marketing campaign tied into that. That business was very strong. Relaunched, great color selection, the way only Old Navy can. So it was a brand new tea program, bought very well, marketed very well. And that again wasn't a one dimension, but I referenced it only because that's really at the heart of what Old Navy does well.
To be quite honest with you, I wish Old Navy would have had a little bit more inventory on colored bottoms. I'm sure we're not the only retailer to make that comment. Somebody was asking Sabrina in order about chasing about inventory. I think it was you actually John. So the notion from our end was that there was a one spot that if you could redo it, but Old Navy is such a big business.
It doesn't take a lot because we're not dealing in tens of thousands of units when you're dealing with Old Navy. When Old Navy starts to do well, you're talking about 100 of thousands of units. So the team did the best they could. And it's not like we disappointed customers broadly in the spring, but if there was one category that they would like to have gotten a mulligan on, it probably would have been on colored bottom. So but now that if you go to our store now, there's definitely color on a number of categories for Old Navy.
So I would say that their assortment mix change, which is something I talked about on the teas, helpful. They did well on color, but they were probably the one brand that wished, because it was tough to predict that they could have had some more inventory in the key category. Great. Thanks.
Your next question comes from the line of Everen Koppelman with Wells Fargo. Great. Thank you. Good afternoon, everyone. I had a question on the marketing expense for the Gap brand.
It might be impossible to really figure this out, but how much of the improvement at that brand
do you
attribute to the marketing versus maybe the product improvement? I didn't know if you had certain ways to measure the return on investment in marketing. Thanks.
You're welcome. No, we have so many people figuring that out. We got a department of very smart people who can figure these kinds of investments out. I'm not really at liberty in fairness to sort of say, well, this was driven by the product, this was driven by the marketing. What I can tell you is when we had the call in February and said, look, we're going to put some more money in marketing.
We're going to be thoughtful. We've mentioned also that we have the flexibility to shift up or down on marketing. It's one of those investments that you can make and reach your business. And if you see that it's actually driving in this case here, one of the number one metrics of increasing metric of marketing would be traffic. And the second biggest metric as far as I'm concerned is increasing your sell through at right price.
And so I felt good about the marketing at Gap. But our new team in New York working with our new agency and the execution in the stores was really well done. We're now in our summer program, which is the evolution of the platform of Be Bright. And now you have meet your own tee program, which is instead of bottoms, we're talking about T shirts at Gap. So we can quantify it.
We can quantify the mediums. We can quantify markets. We can Our
Our next question comes from the line of Janet Kloppenburg with JJK Research.
Hi, everybody. Congratulations a great quarter. Sabrina, I think I'm a little confused about something. I think you said that we shouldn't count on the leverage of rent and occupancy going forward. And I'm just wondering if comps continue to be positive, shouldn't we is there any obstacle to getting leverage on rent and occupancy?
And if you get some AUC contribution, couldn't we expect more leverage on the same level of comps?
Yes. I'm glad I have the ability to clarify that, Janet. No, what I said was, we remain very confident actually that we will leverage rent and occupancy on a positive comp. I just said in the Q1, I caution against extrapolating that level of 1 130 basis points on a for comp, because there's a lot of moving parts that can make quarter by quarter a little bit lumpy, but we feel confident about leveraging on a positive comp.
You mean there's factors involved in rent and occupancy or there are other factors including markdown levels, etcetera?
No, I was just referring inside of rent and occupancy. And if you go back to my remarks, I mentioned items like timing of store openings and closures. We have quite a ramp up plan going, for example, with our Athleta stores here domestically with our China stores. So the timing of that can make it bumpy quarter to quarter. And in addition, there's other stuff like landlord settlements.
There's the timing of amendments and escalations. But overall, confident that we will leverage rent and occupancy on a positive comp.
Spring season, but perhaps that Old Navy would come along later, that its turn was not ready yet, that you didn't see it coming. But they actually had a very good Q1. So I'm wondering if you're feeling more confident there or if we should look to Gap and Old Navy to drive the business for the next couple of quarters. Thank you.
No problem. What I was attempting to communicate back in February was that Old Navy still had what I was referring to quite often on the call corrective measures to make. And not that by any stretch of the imagination was
Gap and Banana Republic done with
their commitment to the corporation of continuous improvement week over week, month over month, quarter over quarter. But from my lens, they were a little further ahead and there was some assortment changes and I think I spoke to assortment mix that had to change and some pricing competitiveness that had to get a little sharper at Old Navy coming off of as we referenced earlier through cost increases, a very challenging Q4 for them. So yes, you're right. I'm not saying I was pleasantly surprised, but if I would have handicapped it back in February, I haven't seen all the product, seen all the marketing, knowing the teams, while I was obviously we're all pleased with the overall 4 comp and the 5 at Gap, 5 at Banana Republic and the 4 at Old Navy. Sitting here 3 months ago would have been easier for me to think that yes, they were better prepared Banana Republic and Gap for the Q1.
And Old Navy could still have a good quarter, but they probably have to work a little harder. So hats off to Nancy and Tom for while still making the changes that I would say Janet now we're almost done. We're in the month of May. I think I committed on the call by the end of May, the majority of their changes would be in place. So hats off to them to be able to still do a 4 comp and contribute to the overall profitability and performance of the company in the Q1.
Okay. So you're in the pricing architecture there, is it now where it needs to be?
Yes, there might be, Jenn, a few more tweaks coming in. I would say from my perspective, after the new flow comes in, in May, which is just before Memorial Day weekend. That all the work we did last September October will then be reflected in assortment and our value proposition.
Great. Lots of luck.
Thank you.
Your next question comes from the line of Randy Konik with Jefferies.
Hey guys, thanks a lot. I guess, Glenn, when in terms of Tracy's influence on the business in the back half, what do you think we should be looking for there? And on the sustainability of improvement in Old Navy, do you think that that happens once all those changes done in May? Thanks.
No problem. The first thing I would say, it's always worth repeating that all of our businesses from the design perspective are led by teams. Michael Ingram Jones is our leader of design at Old Navy, but he has a very great team that works with him. Simon Neen is our Head of Design at Banana Republic has a very good team. Tracy is not our Head of Design by any stretch of the imagination, but she's this new role called Creative Advisor.
So she's working with a team led by Pam Wallach in New York. And I would say, Tracy, as I mentioned on my opening comments, her and Jill both have a very nice impact on the design teams that are contributing at a very high level. Her impact based on her contribution and the advice she's providing as creative advisor will be felt over the holiday season in Gap brand is when we get to see how her working in conjunction with this very qualified design team in New York will bring the Gap product for holiday around the globe. So that's my view and the same would apply to Jill, because Jill, once you start a little bit later than Tracy, Old Navy's pipeline is shorter. So Jill will have the same contribution working really with Michael Ingram Jones, who will own all our product as he has for the last 4 years, providing whatever great advice she can to Michael and his team to actually really improve our assortment to even a higher level for holiday.
So that's on the Tracy front. In terms of Old Navy, what I was just saying to Janet was definitely May near the end of May more. I'd say we may assortment will probably miss the last reporting week, but the assortment that delivers end of May, which really we call the June product, will be when the final changes and tweaks from a value proposition from making sure that the right balance exists inside of Old Navy between good, better and best, which we admitted about 6 months ago might have gone a little bit off in the fall and holiday. Those will all be in place and now it just comes down to them working within that framework and designing amazing product, merchandising, marketing and the store teams to make sure that Old Navy's triangulation even though it's more than 3 of fun, fashion, family and value shows up really strongly from June on.
Thanks.
Your next question comes from the line of Paul Lejuez with Nomura.
Hey, thanks guys. Just wondering if you're seeing a lift in Old Navy stores that share a center or nearby JCPenney store? And second, just wondering if you could talk a little bit about sales productivity and 4 wall profitability of Athleta? Thanks a lot. Paul, we're not really tracking it directly.
Look, when somebody in a quarter only leaks out 20 plus percent of sales in a business that's sizable, I would say that I can't think of anybody in the value business that get some benefit from it. But we're not Old Navy is not by any stretch the imagination. J. C. Penney is number 1 competitor.
I'm sure there's other brands you can think of, but more likely when they reported their Q1, if they had comps, maybe might have been above their run rate comp, maybe they got more benefit. But there's nothing we can really look at Old Navy and see it. But I'm sure anybody in the value business got some benefit from that. And that team there, I'm not speaking for them, but they're going through a lot of unique work to change their business model. So this is just one of those quarters that happens.
And nobody here is sitting back and thinking it's sustainable in terms of the amount of business they're releasing. I'm sure that they were doing all the work they can to make sure it's not. So that's my view when it comes to JCPenney. Now I'd ask why do the four wall businesses, we're actually really pleased. We would not have gone forward try to open 25 new stores in 2012 if the indication that we had in the stores coming weren't very favorable.
The thing about that business that if you're in any other business inside of our building that you'd have to be envious about would be its productivity per foot is very impressive. And they do very well and that's a big driver of that is because of their product and their marketing is their cost sales at REG are very impressive. They do a very good job of that as a business. And I look at it and go while we brought some value and advantages to this team, this company and brand that we brought into the fold a couple of years ago, At the same time, they're bringing a lot of lessons to us here at Gap Inc. And so we've been very pleased with the people at Athleta and Scott Keyes' leadership and the business model they've created online catalog in stores is a very nice business.
Any quantification at all on that, Glenn?
No, not really. Okay. Thanks. Good luck, guys.
Your next question comes from the line of Lorraine Hutchinson with Bank of America.
Thank you. Good afternoon. Simply just walking back to the SG and A. There's been so many years where that has been such a controlled line item. And just curious if you start to see sales stabilize and continue to trend positively, are we in for a few years of an investment cycle in either your stores or your home office?
Yes. I think it'd
be premature to get too far ahead
of ourselves, Lorraine. But certainly this year, to get too far ahead of ourselves, Lorraine.
But certainly this year, we would like to
make those investments that we've been pointing to since last quarter call, focus mostly on the domestic business, because, again, I'll point to the fact that we're pleased that since 2,000,000 again, I'll point to the fact that we're pleased that since 2,008 between 2,008 2011 that total expense base remained relatively flat, while we were making some significant that to keep that line tight. And we felt fine about that. I think this year given that we're actually seeing product assortment improvements that we've been looking for in our North America businesses, we want to support and propel those with investments in the business that we think have a high likelihood of a nice return for our shareholders. So that's clearly our position this year. How long that might last more to come, but it's certainly our position this year.
And again, we'll watch the pacing and momentum, because we definitely are always balancing driving value to our shareholders and we'll be responsible about the magnitude of those investments depending on that top line.
Thank you.
And your next question comes from the line of Jeff Klinefelter with Piper Jaffray.
Yes. Thank you. Glenn, I just wanted to ask a little bit about the international business in light of the focus on those markets right now. Kind of what your expectations are in your core markets, your core international directly operated markets? And then specifically since you mentioned Old Navy in Tokyo opening a store with plans for more, you've had a gap business there for years and just some brands have had issues in that market.
Just wondering kind of how you're approaching the Old Navy rollout differences between that and the U. S. Pricing, marketing positioning, etcetera? Thank you. Okay, Jeff.
Well, look, they had a 13% sales increase as far as I know in the quarter. And so we feel good about that. That's because what we've tried to do and I think we've been thoughtful about it and explained if it's not on these phone calls, it's certainly at conferences that we attend that we like the way we've actually mixed the business internationally. But it's a combination of our corporate owned business, our very strong and exciting franchise business grew at 30% in the Q1 and now with global online and global outlet. So we're looking at it this way.
We're saying, look, we take the mix, but we also look at every country. It's such a broad statement as you can appreciate. I'm calling it an international business. We have a European business and we're watching very carefully. Our team there in Europe knows that.
They're making all the right decisions whether it's hunkering down what they have to hunker down, making sure the stores that are strong for us, especially in big centers like London and Paris and Milan and Rome, but those stores are strong and out there winning. There is very difficult conditions in Europe. Then we go sort of around the world and look at our business in Japan, which in the quarter we had to live with the about 6 weeks of the anniversary of the tragedy of 3.11 and then 6 weeks of some recovery. And we do feel really good in Japan otherwise about our business in general, but our team there and about the prospects to put in online more outlet stores and introduce Old Navy. China, we've committed ourselves to 30 stores this year.
We're on track. We did 7 stores in the quarter, which was a nice number for us. That's good. Usually you don't see front end loaded real estate as I mentioned in my opening comments. And our franchise business of 30% comp was sorry, 30% total sales was very strong.
So was our we don't release these numbers, but our global online business was also very powerful in the Q1. We really like what we saw in our international markets and in China. That's why we're looking forward to Japan. Now when it comes to Old Navy Japan, not to get into too many details, but I think one thing I would like people to appreciate is because it's a value business similar to our outlet business, really what you're looking at is a push model. So we're the Old Navy team at a Mission Bay, yes, there's a nice collaboration with a very, very small focused team in Japan, who's going to do the execution.
But really we're pushing out the product, the marketing, the store design, the standards, the operating model is all based on how Old Navy operates here today that being pushed out into the Japanese team and there's a great team there. They're going to help execute it working in conjunction with the team here in North America. But a completely different model than Gap, which we've been working since I've been here to sort of undo a little bit and get some more consistency and continuity around the world, which a big part of that was opening the global center in New York was to get to that. Old Navy starting from the global center in New York was to get to that. Well, maybe starting from day 1, we're going to mall it more off our very successful global outlet business and have the team here in San Francisco be pushing out and let the Japan team execute it with very little, I want to be clear on this, very little localization.
There'll be some, but we did all our research here. We've talked to so many customers and so much research like we did in China. That Old Navy, the way it's positioned here in North America will work very well in Japan. That's why there's very little localization. Great.
Thank you. That's very helpful.
Your next question comes from the line of Brian Tunick with JPMorgan.
Thanks. Good afternoon. I guess one for Glenn first. Just sort of maybe at the Gap division. We know it's early, but is there any evidence of regaining lost customers here early in the year?
Or are you really seeing your existing customer buying more? And you have the DVF Kids and the Threadless Halo playing out. So just curious what you think about regaining lost customers? And then for Sabrina, maybe any comments on why you've been so cautious on the share repurchase program? It looked like Q4 was pretty slow and here as well in Q1.
So just thanks very much.
Brian, on the customers at Gap, definitely part of the reason to step up some marketing and do the work we did almost over a year ago now, bring in a head new Chief Marketing Officer for the Globe and Seth Farm and go to a new agency relationship with Ogilvy was to not only get new customers into the stores globally, which is really one of the top priorities for Steven Sonex and for Art Peck. But also I would say we want to make sure we also shift the mix of our customers. And as we look at our range of sort of age demographic business these days is so much more about just age demographic. But to be only on that measurement, we do believe there's an opportunity for more customers in the mid late 20s, for more customers in the mid, late 20s, early 30s to be experiencing the brand, checking it out, people who maybe we have not been as relevant and appealing to in the last number of years to get them to come in to see Gap. Now, fortunately for us, a nice trend came by in the early part of this year, which really could appeal to a very democratic group of customers, but maybe especially was appealing to people in the age group I just mentioned.
So the marketing as you saw was attempted not only in the marketing and the creative that was done from Seth's team and the agency, but also in the mediums I would say that the local marketing teams and the global team are choosing to speak to our customers. So I'm actually quite pleased with the little bit of research I've seen. It is early days that were there some new customers in the quarter? Absolutely. But I'm really what I'm digging deep into, as I know Art in North America in particular is digging deep into is what kind of mix of customers is he getting.
And that is one of the goals of the incremental marketing.
And with regard to share repurchase, Brian, I wouldn't read too much into the Q1 at all. I mean, we've years where our pattern is very lumpy and we've had years where we haven't bought in the Q1 and it's been back half weighted. I think what was unusual about the Q1 was that for our stock to go from under 19 when we entered the quarter all the way above 29, that's just an unusual movement in the stock very quickly. And so our programs just sort of didn't catch up with that level of movement, let's say. But we're obviously long term believers in our stock and nothing's changed with regard to our philosophy of distributing that excess cash.
So share repurchase is embedded in our overall spectrum of scenarios in our guidance. I think it's just important once again to factor in that the timing matters. So the more back half weighted you get, it actually can have Thank
you.
Good afternoon. I
Thank you. Good afternoon. I was wondering, Glenn, if you can speak to Piperline with the anticipated opening in New York. How is the team thinking about replicating that on experience inside the store or presenting the collection in person? And then I also had a separate question just regarding the competitive landscape.
It seems like we came from a Q4 timeframe when there was a lot of excess inventory in the marketplace and perhaps a lack of fashion trends to excite consumers to now a complete reversal in Q1. How do you view the competitive environment as we go into Q2? And how is the team kind of executing against that going through the second half as well? Thanks.
No problem. On Piperline, look, I'd say in some ways we're taking a little bit of the blueprint from Athleta. Now they're different
businesses for sure. And the Athleta purpose for doing
stores was so businesses for sure. And the Athleta purpose for doing stores was so such a strong call from our customers who bought on catalog and online that the nature of that product, they really wanted the opportunity to physically experience the brand and try that product on because it's so technical. And experience the brand and try that product on because it's so technical. And the customers they are going after while they really love the online experience and really and were inspired from the catalog, they really wanted a physical manifestation of the brand. But we've taken that blueprint for Piper Lineman.
So it's tough. If we were standing right now in September in SoHo, I could articulate to you how that 4,500 square foot store is going to come across. But I actually think as pleased as I was, because we have a central team that does design, as I'm pleased with that team central team on store design that came up with the magic to how to translate Athleta from an online business to a bricks and mortar offline business, I really believe that team is going to do the exact same thing for pipeline. Now it's one store, right? So nobody is going to get excited.
It's just we're going to do one store. And whether there is another store from there or not, we'll figure it out. But it's something that our customers given the target for Piper Lime have asked for and I think we should try it. Now we did this for us, but I'm thinking more than Piper Lime. We could see some kind of rollout.
That was more what's the number? How big could it be given that because it's a different business. But here I think we're going to find out whether it ends up being just a phenomenal marketing vehicle, so be it. If it ends up being something greater than that can have commercial success, we'll look at it. This will I won't know that answer for another year from today.
Now when it comes to the competitive landscape, I'm not sure as much if it's the trend that is affecting the competitive landscape. It's obviously still highly competitive out there, but how our teams are thinking about it. And I was saying this a little bit to Brian, this investment in marketing to be determined what level and to what pace we're going to keep it going. But the intention behind that at Banana Republic online Banana Republic a lot of direct mail online obviously some investments in online media for the total brand for online business and for our store business and the out of home marketing we're doing for Gap brand. The intention behind that is to really showcase the brand and get excited behind product and the positioning of those two businesses.
And because of that, we hope and we saw that in the Q1 where we become less reliant on some of the promotions that all of us got caught up to starting in the summer of 2,008. So I'm thinking maybe you're correct, Betty, a little bit of the trend, maybe a little bit that the consumer conditions are slightly better than a year ago. They're not great, but slightly better than a year ago. And some unique marketing and I would say traffic driving initiatives that each brand has taken. Look at Old Navy are doing something called Super Cash, which is a bounce back program, which is very successful for them.
That reduces their dependency on just traditional promotional needs. So all of our teams are thinking, 1, creatively. Secondly, they're always thinking about the customer, what their brand stands for them. And thirdly, which matters most to me, how do I win and beat the competition through great ways of getting people across our lease line at a value proposition that fits each one of our brands.
Thank you and best of luck.
And your next question comes from the line of Dana Telsey with Telsey Advisory Group.
Good morning or good afternoon everyone. Nice to see the improvement. As you think about marketing, Glenn, how do you think of marketing by brand marketing plans by brand, certainly with what you've done with Old Navy? How do you see it resonating given the enhancements you've made in the product? And just on the product side, the needle movement between product and
price, obviously, more opening price points at Old Navy. How do you see that
architecture moving forward? Opening price points at Old Navy. How do you see that architecture moving forward? Thank you. On the marketing, as I mentioned on the
call, how
I think about it across the brands, I mean, we came into the year feeling actually pretty good, because we put a lot of time on product and on marketing platforms in the fall of 2011. So I came in thinking for the first time since I've been leading the business, we have had a clear sense of our product direction. And therefore, I would felt more confident and we haven't decided yet how much marketing to put into each one of our businesses, but I felt more confident than I felt in a long time putting marketing behind the direction. And what I believe to be the sustainable direction, this is not just a one time quarter, we're hoping our that our teams who have worked really hard, design team, our merchant teams really get the clearer view now of term momentum sustainable great product inside of our stores. So the marketing, whether it's the platform I talked about earlier on Be Bright, whether it's the versatile new work at Banana Republic, whether it's Funovation, Inc.
With the key focus there being on fun and expression of value at Old Navy. We actually think that our marketing has delivered for us in the Q1 and no different than product. The marketing teams know that we expect benefit. We expect traffic. We expect a step up in relevance because otherwise we'll put the money forward.
And that's one of the key components for us now focused on Old Navy. Old Navy is a brand and a value sector. That's a huge competitive advantage. So they have to continue to feed marketing. They have plenty of marketing from last year.
It's not too much not any fresh marketing going into Old Navy. They have plenty of marketing from LY. Their issue is just continue to do the right kind of marketing, the right kind of messaging to build on that differentiation of messaging to build on that differentiation of being a brand in the value sector. Now in the product and price, which we all obviously all view, including Dana, the industry called what's our value proposition. Look, I believe the company because of the unique year in 2011 may have gotten off what I thought was a very good pricing architecture value proposition in 2010.
Now there was unique circumstances, but we've already had our moment where we said that we made some mistakes in 2011 by not staying true to a value proposition and pricing architecture of workforce in 2010. So it wasn't very difficult to go back because the competitive landscape is not such a change for us that any one of our brands were to dramatically shift the architecture and the value proposition in 2010. We just got to tweak it. And I think that I've been part of meetings with the teams because that's something I get involved with when it comes to the brands. And I do believe there's always work.
This is not a static moment, it's fluid. But the work I've seen done so far, what I want to throw in fairness, I want to throw outlet business in there too, which is a very important pricing architecture and their promotional positioning. But I look at all of those businesses, including online, I think some very good decisions are being made. But I expect them, 1, to stay highly competitive to know exactly who they're up against, where their share needs to come from and make sure they protect their value proposition going forward by making good intelligent
decisions. Thank you.
Your next question comes from the line of Laura Champine with Canaccord Genuity.
Hi. Sabrina, I just wanted to dig a little bit more into the EBIT rate guidance because we were surprised that it's not changed given the success that you've shown in Q1. Are there additional expenses that you're adding to the back half? Could you comment on that a little bit more? And also, what kind of contribution do you expect to profits from the franchise business this year?
So I think with regard to overall operating margin, there really Laura has
been no change in our overall view of how the
year plays out. In our overall view of how the year
plays out, with regard
to driving that about 10% operating margin. So again, we're saying we want to drive some top line. We want to do it at healthy margins with some margin expansion, We want to do it at healthy margins with some margin expansion in the back half. And then we're going to deleverage operating change in how we
are viewing the business for the full year.
And then the second part of your question was? The contribution The contribution Right.
Yes. So franchise franchises
is a segmented, but I think Glenn and I have said several times that, as you can imagine that model is a very healthy model. So we're very pleased to see it growing 30% in the quarter and continued growth through new partners and new countries. It's obviously very capital light. It drives a very nice profile for us in terms of earnings growth and a very nice return on sale. So the more that mixes in, the happier we are.
Got it. Thank you.
And your last question comes from the line of Robin Murchison with SunTrust. And Robin, your line is open. If your line is on mute, please unmute your line at this time.
Okay. Well, 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 Q1 results as well as the forward looking guidance included in Sabrina's remarks. And as always, the Investor Relations team will be available after the call for further questions. Thank you very much.
Thank you, ladies and gentlemen. This does conclude today's conference call. You may