AGM 2012

May 15, 2012

Good morning. We had to wait a few minutes. Members of management were late. Hopefully they're shareholders. I want to welcome everybody to Gap Inc.'s 35th annual shareholder meeting. I'm Glenn Murphy, Chairman and Chief Executive Officer. Joining me on the stage this morning, as they have for the last 5 years, are Sabrina Simmons, Executive Vice President, Chief Financial Officer, and Michelle Banks, Executive Vice President, Corporate Secretary, and General Counsel. Our board of directors are here this morning. They're sitting in the front row. Before I introduce each one of them, I want to acknowledge that our honorary board member and our founder, Doris Fisher, is here this morning. Doris, welcome. Our board consists of Bobby Martin, Lead Director, Chairman of Governance and Nominating Committee. Adrian Bellamy, Chairman of the Compensation Committee. Mayo Shattuck, Chairman of the Audit Committee. Domenico De Sole. Jorge Montoya. Katherine Tsang. Joining us this morning by phone, because she has her own annual meeting going on in Dallas, is Bella Goren. Last but not least, Kneeland Youngblood, who is not standing for re-election in 2012. Kneeland's been on the board for 6 years, has been an incredible director, very much challenging management regularly on whether we're doing all the right things, and mostly through a lens of the customer. I want to make sure that Kneeland gets acknowledged. Kneeland, thank you very much. Our executive leadership team is here seated on the left. The only person missing is Steve Sunnucks, who's in charge of international business. Right behind them are some people we have a deep association with at Gap Inc. They're members of Enterprise for High School Students. We have their executive director here. We have alumni. We'll be hearing a lot more about our association with this great organization later in the program. The agenda for today is we're going to hear from Michelle, who will conduct the formal portion of the meeting. Sabrina will come up and take everybody through the financial report to shareholders. I will come back and give all our shareholders an update on our progress towards the company's strategic growth plans. We'll take questions from people in the room. Michelle? We actually have 10 board members. I named 8. I can't believe I did that. I'm a huge fan of a smaller board. The problem is, I cut out 2 people who own 40% of the company. I was so enamored with Doris that I forgot about Bob Fisher and Bill Fisher. Is that your way of telling us we won't be elected? No. Oh, that'll come later. Who are in very good standing with the board. Thank you, Michelle. Welcome, everyone. I'd like to ask you all to please turn off your cell phones and other electronic devices as I call the annual shareholders meeting of Gap Inc. to order. Today's meeting is also being webcast, and the webcast will be recorded and available on gapinc.com. Those participating by 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 April 19th, 2012. After the formal portion of this morning's meeting, after we hear from Glenn, as he mentioned, we'll answer questions from our shareholders. Please note there is a two-minute time limit for each person addressing the meeting this morning. John Scheffler of Deloitte & Touche, our independent registered public accounting firm, is also available this morning to answer shareholder questions as appropriate. Please note that only shareholders may ask questions at this annual meeting. We will now vote on the four proposals outlined in the proxy materials. The four agenda items are, one, the election as directors of the 10 nominees named in our proxy statement. 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. Four, a shareholder proposal regarding ending trade partnerships with Sri Lanka. We have executed affidavits of mailing of notice of the annual meeting of shareholders of Gap Inc. These state that notice of the meeting has been mailed as required and outlined in our bylaws. The affidavits will be filed with the minutes of the meeting. Barb Novak of Wells Fargo Shareowner Services, our transfer agent, is here and acting as Inspector of Elections for this meeting. Barb tells me that a count of the shares represented by proxy shows that we have a quorum to conduct business this morning. Before we vote on the four proposals, are there any shareholders 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 at this time and we will assist you. If you already submitted a proxy, you do not need to vote by ballot. Are there any hands? No. Okay. Thank you. I see no hands. We will proceed with the four 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 LLP as our independent registered public accounting firm for the fiscal year ending February 2nd, 2013. The third proposal is the advisory vote to approve the overall compensation of our company's named executive officers. The fourth proposal is a shareholder proposal regarding ending trade partnerships with Sri Lanka. Is the proponent of the proposal present this morning? Will you please stand and identify yourself? I am the- Thank you. I will now entertain a motion from you concerning proposal four. As the proponent, you have two minutes to present your statement. Thank you for the floor. The proposal that we submitted is about not having a relationship with Sri Lanka. I have been told by your lawyers that it is not called a trade partnership. I am a physician, and so I am going to talk about this from my point of view. In the spirit of this being a very reputable company, I don't think that Gap should be having any relationship at all with Sri Lanka. The reason is that the government of Sri Lanka has been brought forth as a country that violates human rights. Three years ago, at the end of the civil war, 40,000 people were massacred, and these allegations are very serious. The reason that companies such as Gap should care about this is that by trading in countries such as this, when you have the choice of working with vendors in over 50 other countries all across the world where very good work is being done by the company, including investing in local communities, such as through your PACE program to help female empowerment. Why this company should put its reputation out there to work with a government and a country that suppresses its minorities. It has the highest military in any country, per capita military in any country in South Asia. The United States and the UN Human Rights Council have resolutions that were passed unanimously against Sri Lanka, and this did not end when the civil war ended three years ago. There are continued human rights violations, and just six weeks ago, in the UN Human Rights Council, there was a resolution passed against Sri Lanka, and the resolution was brought to the table by the U.S. government with 40 co-sponsoring countries and won by a vast majority. In the international arena, there have been lots of commentary on why people should not be engaging with Sri Lanka. There is, of course, every right for everybody to work there, and if Gap and other companies leave Sri Lanka, in the immediate future, there will be people who lose employment. My proposal is not about labor rights or equitable employment, but working with a government that is violating human rights. I ask- Please wrap up when you can. I ask that the board seriously consider ending all of your relationships with Sri Lanka and similar countries that violate human rights. Thank you. Thank you, and thank you, Doctor, for being here this morning. The board has reviewed this proposal and given it careful consideration. Our company and our board have a long-standing commitment to corporate social responsibility, as demonstrated by our initiatives around the world. The board understands the seriousness of the human rights allegations in Sri Lanka and the actions of the Sri Lankan government in the conflict and in the aftermath. Based on our review, the board believes that apparel production in this country is a benefit to its citizens. In addition, we are monitoring the steps taken by the U.S. government, the European Union, and the United Nations, and we believe these are in the best interests and that these institutions are the best institutions to be engaging with the Sri Lankan government at this time. For these reasons, and as further described in our proxy statement, the board of directors opposes the adoption of this resolution in as much as the board does not believe it is in the best interest of the company and all of its shareholders. The board therefore recommends a vote against the adoption of proposal four. We welcome the proponent and anyone else interested in this issue to speak with Bobbi Silten, our Senior Vice President of Corporate Responsibility, after this meeting. Bobbi, do you want to wave? Thank you. The polls for the four proposals are now closed. I'm sorry, open. I have to do that first. If you would like to vote by ballot, please again raise your hand. Seeing no hands, the polls for each proposal before the meeting are now closed. Barb, can you please give me your preliminary report? 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 Gap Inc.'s named executive officers has been approved. The shareholder proposal regarding ending trade partnerships with Sri Lanka has not been approved. The final report of the Inspector of Elections will be filed with the minutes of this meeting. This concludes the formal portion of the meeting. The annual shareholders meeting is now adjourned, and we will hear from Sabrina and then Glenn. Before I turn the meeting over to Sabrina to discuss company performance, I want to take this opportunity to address some administrative matters. The information in the remaining portion of today's meeting may contain forward-looking statements. These are important factors that could cause our actual results to differ from those forward-looking statements. Information regarding factors that could cause our results to differ can be found in our annual report on Form 10-K for the fiscal year ended January 28, 2012, which is available on gapinc.com. The information in today's presentation also includes a non-generally accepted accounting principle, free cash flow, which is under SEC Regulation G, we are required to reconcile with GAAP. The reconciliation of this accounting measure to a GAAP financial measure is included in the same Form 10-K available on gapinc.com. As a reminder for shareholders attending the meeting in person this morning, shareholders' questions will be answered at the end of Glenn's presentations. I'd now like to welcome Sabrina. Thank you, Michelle, and good morning, everyone. Overall, 2011 was a challenging year, marked by an unprecedented escalation in global cotton prices, the debt crisis in Europe, and the natural disaster in Japan. In addition, consumers remained focused on value, which drove a highly promotional retail environment here in North America. As a result, after four consecutive years of earnings per share growth in the double digits, our 2011 financial performance was disappointing. That said, it's worth pointing out some bright spots in last year's performance. We made significant progress on our growth initiatives, which we expect will deliver long-term value to our shareholders. These include continued growth in international, especially in China and through our franchise channel, and domestically with our Athleta store openings. Importantly, as we continue to invest in these initiatives, we tightly managed our operating expenses, and we delivered 30 basis points of leverage. We grew net sales at the Gap Inc. Direct division by 20% to $1.6 billion. We continue to execute on our goal of reducing North America's square footage through consolidations and closures at Gap brand and through downsizes at Old Navy. We generated over $800 million in free cash flow, and we distributed $2.3 billion of cash to our shareholders through dividends and share repurchases. In total, we repurchased 111 million shares at an average price of $18.88, which is a significant value when compared to our current share price. Let me now turn to our 2012 priorities. Our first priority is improving sales and delivering healthy merchandise margins. It's our objective to drive modest top-line growth through the stabilization of our base businesses and a continuation of our global growth initiatives, which are focused on our online, outlet, and franchise channels. Our second goal is investing in our businesses. After 5 years of extremely disciplined expense management, coupled with a focus on international investments, we plan to invest more in our domestic businesses in 2012. With greater confidence in our product, we plan to invest in areas like marketing and store payroll. However, we are committed to being prudent about the level of investment, depending upon our momentum and our likely returns. Our third priority, returning cash to shareholders, remains intact. In 2012, it's our intent to increase our annual dividend to $0.50 per share, representing a payout of nearly 30% of net earnings. Our board approved a $1 billion share repurchase authorization in February. We're pleased that our first quarter 2012 performance represents meaningful progress against our priorities, including delivering 6% total revenue growth and growing our earnings per share. In conclusion, we're proud that we've continued to demonstrate our commitment to shareholders, and we feel confident that our long-term strategies will deliver additional value going forward. Thank you. Now I'll turn it over to our CEO, Glenn Murphy. In the time we have remaining, I thought I would do what I do every year, which is give our shareholders a sense of how Gap is progressing on its strategic growth initiatives that we spoke to shareholders back in 2007. From my perspective, everything we do in the company starts with the vision of the business. The vision of each brand is critical. The vision of Gap brand, of Banana Republic, of Old Navy, of Piperlime, of Athleta. What is the vision for them to differentiate themselves from the marketplace, and most importantly, win? At Gap Inc., we also have a vision. That vision, as we presented to shareholders last year at this meeting, we're sharing American style around the world. The key component of that vision is American style. More and more, while that's critical to our success here domestically, as we go out around the world and compete against the likes of H&M and Inditex and Uniqlo, the American style component, how that gets interpreted inside of each one of our brands in a distinctive way, is critical to this organization and this company succeeding on the global stage. The next level, just below our vision, is what's the strategy of the company for success? This is not new to our shareholders. This has been for five years. We've spoken every one of these meetings, and any time we're in front of shareholders or analysts on calls or meetings we may have, we talk about the fact that we have five distinctive brands. The apparel business is really fragmented, and we feel the best way to come to market is with these five brands. What's unique about us is the channels in which we express these brands. The specialty channel, which is best known. We also compete very effectively here at home and around the world through our online channel, our value channel, and our growing franchise business. Lastly, strategically, as we look at the geographies and the potential around the world, we've done the calculation that our businesses, our brands, can operate in 90 countries around the world. We just opened up in our 40th country in Q1 of 2012. That was in Panama. As a matter of fact, Bob Fisher, who's a board member, was there for that opening in our 40th country to see Gap store open up in this next phase of the evolution of its growth. Taking the strategy, it's so important for any company that's customer facing is how do you compete against what competitive landscape? Can you be successful? Can you gain market share? We believe through this strategic lens, that will provide the success that Gap Inc. needs, not only in 2012, but looking forward in the future. One different way of looking at it, which we didn't show this slide last year at the annual meeting, was to say, well, another way that our strategy works for us is also helps diversify our portfolio. The center of this slide is our North American specialty business. That's best known by shareholders, our big stores in New York City, in Chicago, here in San Francisco. These brand defining iconic locations are critical to telling our customers here and around the world what is Gap brand, what is Banana Republic, what does Old Navy stand for, and how does it show up to its customers each and every day? As we look more broadly, one of the goals of the last five years has been to diversify this portfolio and expand into other areas. If you look at this chart from the left-hand corner and go clockwise, the value business. How do our brands get expressed from a value perspective, mostly in outlet locations, in power centers, in value centers? Why is that right? It's right for customers. Even before the recession, the value segment of apparel was growing. Since the recession, it's grown at a much faster rate. Good for customers, by the way, good for shareholders. Our highest return on sales, highest return on capital is in this segment. The next one is our online business. Of course, there's been phenomenal growth and a nice tailwind when it comes to the online business for many, many years. Since the advent of the iPad, smartphones, mobile technology, the ability to access a brand through that kind of technology and to buy online or market online and learn online is becoming more and more important to all businesses. We have been leaders in this area for the better part of eight years. As we look at our business, evidence of this success was we had 20% growth last year in the online business here domestically. A critical part going forward is taking that business on a global stage, also good for our business because it's great return on sales and great return on capital. Again, right for the customer, right for shareholders. The next part of this strategy is the international business. Looking at many more countries, I talked about earlier with Panama, leading that through our franchise division, our franchise channel. Of the 40 countries we operate in, 34 of those are through franchise. Last year, our franchise business grew very strongly. We feel very good about it as a channel. Also, a very good return on capital business. Lastly, new brands. I'll just reference one of them. Piperlime has been a great brand inside the company. Everything that we operate at Gap Inc., all of our businesses are vertical businesses. Piperlime is horizontal. A chance to give our customers who go onto gapinc.com and use our universality platform to buy from different brands to get exposed to products and brands outside of the ones that we control and own ourselves. We're so confident in Piperlime, we're going to open a store in September of 2012 in New York City, following the same blueprint that we presented to shareholders 18 months ago for Athleta. The next part of the strategy for us is just if I can expand on the progress we've made. This is a chart we show every single year from 2006, 2011, the goal of the company for 2013 is to get 30% of our business in international and online. That's great progress from 16% five years ago. We hit 26% last year. We're well on our way, and we're confident and committed to hitting this goal with the strategy I just took you through. The next thing as I expand on the strategic initiatives, particularly if I look at the international and the online business in that 30% goal, franchise. Franchise business, this is an image of a Banana Republic that just opened up in Moscow. Our franchise business last year grew at 47%. We opened up in eight new markets. We like the leadership of the business. We like working with local franchisees who know the market. They know the customer. They know what we stand for. They know the real estate. They know how to integrate our brands effectively into those countries. This strategy and this channel, which has been alive and well for the better part of six years, has been hugely effective and a big contributor towards that 26%. The next part to expand upon is our global online business. As I mentioned, domestically, this business has been hugely successful for all the reasons I gave, with a 20% growth in 2011. Now we're looking at it globally as we entered into Canada 18 months ago. We entered into China in November 2010. When our first store opened, we opened up with online. We're operating in 22 countries in Europe, and we'll open up in Japan later this summer. Coming to market with these different channels is critical, and the growth we're experiencing here domestically, which is great because the site's been up and running for the better part of a dozen years. Now complementing that with good growth in international markets is key to delivering on that 30%. Lastly, China. There was a lot of international markets in which the company's embarked in its history. This is the most bold and determined launch that we've had in the 42 years of Gap Inc. This business in China, which we just opened up from the image you see in front of you in Hong Kong, we did 10 stores in 2011. This Hong Kong store is on one of the number one shopping commercial streets in the world. It was exciting last year to open up the 10 stores, get into five markets besides Hong Kong, which is on this image, into Hangzhou, into Tianjin. We're very excited about 2012, where we open up 30 stores in China. The second biggest apparel market in the world after the U.S. is China. Gap Inc. and its positioning and its brands and its strategy are going to do very well in this country. We're off to a good start. We have high expectations for the China market. Let me close off with two points. One, I just want to preview next year's annual meeting and talk to you about where some focuses are being put in 2012. This is really going to help all our businesses globally but is intended to really put forward some initiatives and some investments, first and foremost, to grow in our domestic North American business, which is critical to the company strategy. It starts with product. Everybody knows that our design team, our merchant teams, have rededicated themselves since the fall of 2011 to make sure we bring the best product that is brand appropriate to our customers. One of the decisions we made was to make targeted strategic investments in our product in categories where we know we can win, where we really can dominate and beat the competition. We are making investments in those products, whether that's in fabric, whether that's in trim, in other areas. That started off in Q1 of 2012. We just put out our sales numbers just last week. We're seeing some progress. It's early days, but so important for our global success, but really with a focus on a domestic lens, is where can we make investments that are appropriate in key categories where Gap Inc. in each one of its brands can get a competitive advantage. Of course, if you're going to make that investment in product, the next area you have to look at is marketing. We have a fairly healthy amount of marketing today in our business. Sabrina would agree with that. We keep reminding ourselves and meeting with our brands, we own brands. We don't run stores. The important part is continuing to invest in our brands to make sure that they stay strong, that customers frequent the brands through any one of these channels, and that we have a message. As new mediums of communications become stronger around the world, we are making investments with a real focus on Gap brand globally and Banana Republic. Thirdly, I spoke about pipeline. I can't mention new brands without pipeline, without mentioning Athleta. Athleta is also a key part of our strategic plan in the company to introduce our new brands. We have 10 stores coming in to 2012 with Athleta. We'll open up 25 stores in this dynamic category in 2012. A great team with a tremendous acquisition for the company, we are really excited about not only what Athleta has done, but what Athleta can do for Gap Inc. Let me close by saying that, as Sabrina highlighted, we weren't happy with 2011. There were some challenges with cotton pricing input costs, but at the end of the day, the company's management team were disappointed in our performance. As we look forward and spent the time we did in 2011 going, "What are we going to do? How are we going to change? What initiatives do we have to take forward in the company in order to grow out in 2012, put 2011 behind us, and go out and gain share and win here and around the world?" This management team, a lot of them sitting here in the front row, I know are motivated, committed, and determined to make sure that we stand in front of our shareholders next year and talk to them about the great success the company has had by not only making progress in its strategic initiatives, but show you the performance financially that we showed you in 2007, 2008, 2009, and 2010. We are committed and determined to that. Last thing I want to end with is this. A long time ago, Don Fisher said the following: "Gap Inc. wants to do more than just sell clothes." That is important. There's different components. Last year, as was referenced earlier today, we had Dotti Hatcher came up and spoke about our PACE program, and how we're expanding PACE around the world to help women be more empowered in these developing countries. Today, I want to talk to you about volunteering, and how a lot of people sit in this room, a lot of members of management, and the 135,000 other members of Gap Inc., who are not in the room today, volunteer of their time tirelessly at night, on the weekends, because that's what differentiates us beyond just selling clothes. Here today to speak about that is Tess Roering. Tess is our Vice President of Marketing for Athleta, Tess not only does an amazing job marketing this new brand I talked about earlier, but is an example of many people in the company who volunteer and give of themselves in their communities. Tess? Thanks, Glenn. I am honored to have the opportunity to share Gap Inc.'s involvement with Enterprise for High School Students and the This Way Ahead program. Last year, Gap Inc. and our employee volunteers supported more than 70,000 youth in five countries through 50 youth-related nonprofit partners. Together, we are helping underserved young people with career exploration and job readiness training. I am one of 59,000 Gap Inc. employees who volunteered in 2011, and I'd like to share my experience with you. Serving on the board of Enterprise for High School Students, I was able to use my marketing expertise to help this nonprofit to better position its mission and vision. We launched a rebranding effort called More Than Just a Job that streamlined programs and created a robust and comprehensive experience for students. It was a big accomplishment for Enterprise and a rewarding experience for me. Because of our collaboration, Enterprise graduates are now involved and employed with Gap Inc.'s signature This Way Ahead job readiness and internship program. Employees from Gap, Banana Republic, and Old Navy brands helped to develop the This Way Ahead curriculum, and they take an active role in training and mentoring student interns. Of course, we can't do it alone. The Door, a New York City nonprofit, joined us at the start in 2006, and Enterprise for High School Students here in San Francisco joined the program two years ago. The program is not easy. Students participate in This Way Ahead spend 20 months completing four program phases. First, they go through career exploration. Second, there's a job readiness training program that's facilitated by Gap Inc. employees. Thirdly, a paid four-month internship with either a Gap or Old Navy store for students who are at least 16 years of age. Lastly, ongoing support from a career coach for 12 months after the end of the internship. Intern selection is a competitive process intended to create a real-world experience for youth, and about half of the participants ultimately become interns. More than 1,000 youth have participated in the program since 2006. Two-thirds of the interns have gone on to be hired by Gap Inc. as employees at the end of their internship, and 76% of the youth who complete this program showed improvement in their job attainment skills. Students are excited for this opportunity, and for many of these youth, they will be the first member of their family to go to college. It literally changes lives and is truly inspiring. I'd like to acknowledge the Executive Director of Enterprise for High School Students and my friend, Tony DiStefano, who is here today with four students who have gone through the program, Delilah, Stephanie, Ryan, and Sabrine, who are all in college now. You guys can wave. I really appreciate this opportunity to share with you one of the many ways that we support youth with job readiness training. Thank you very much. Thank you, Tess. I'd now like to open the meeting up for any questions from shareholders. Hi, good morning. My name is Justin Danhof, and I'm here representing the National Center for Public Policy Research. We're a free market think tank and a shareholder. I appreciate the opportunity to speak with you this morning. Mr. Murphy, your company is a member of the Retail Industry Leaders Association, also known as RILA. It's one of the country's largest trade organizations. Recently, RILA launched a massive sustainability campaign, and they lobby for and mandate, among other things, reductions in greenhouse gas emissions, reducing environmental footprint of consumer products, and sustainability labeling for consumer products. As a shareholder, our basic concern is that RILA's push for so-called sustainability will negatively affect Gap's small suppliers and consumers, those who will ultimately bear the cost of this self-imposed green regulation that Gap and other RILA members are advancing. It appears that retailers are trying to cleanse their guilt over selling consumer products by advancing this initiative. However, the cost will be borne by your smallest suppliers and customers. My question is, Mr. Murphy, why should your small suppliers and consumers have to pay more so you can feel better about the perceived impact your company has on the environment? Thank you. Thank you. We are a member of RILA, a member in good standing as far as I know. Here's what I would say, that while RILA does some work with us when appropriate on common goals that retailers may have, whether that's bringing us together to make sure that we have a common voice where appropriate, that could be with government or other working groups. What I can say about RILA is we don't need RILA to work on any kind of document or doctrine to get us to be committed to the environment. Well before this ever came forward, this company, through its corporate social responsibility, has been a huge supporter and has taken really strong action on environmental, whether it's on the global footprint or carbon footprint you talked about, which we have a goal of reducing our footprint by 20% by 2015, or whether it's clean water when it comes to the business in which we're in. At times in some of these factories that we don't own, the water that actually gets distributed post-production needs to be cleaned, and we are working alongside our suppliers. One thing I know about suppliers, I've been in this business a long time, is you can't tell them what to do. You have to work with them, you have to go side by side with them, explain to them the benefit of certain environmental investments that we're willing to make and they're willing to make alongside of us. Not only right for the environment, I think it's right overall in the direction that our suppliers want to take as we, as somebody pointed out earlier, have manufacturing relationships in 50 countries around the world. As far as I know, I spend a lot of time, I just started March meeting with all of our suppliers around the world, which I do annually with Colin Funnell who's here today, runs our supply chain business. While this is not the top topic that we have in our discussions with our vendors, they know we are hugely committed to improving the environmental investments that they can make and we can support them in, particularly in the clean water area. I have not heard anything from our vendors, we certainly would never force them into anything that they weren't comfortable doing. Okay, seeing as how there's no more questions, I want to thank everybody for attending our 2012 annual meeting of shareholders, I look forward to seeing everybody 12 months from now. Thank you.