Good morning and welcome to Gap Inc.'s 2011 Analyst and Investor Meeting. We're so glad that you could join us today. The objective of today's meeting is to give you a comprehensive update on our business and product strategies by giving you a chance to hear from some of our key members of our management team. A few housekeeping things that, of course, I have to do before we start. I just want to remind you, everybody, today that the presentation and the accompanying press release do contain some forward-looking statements. For information on factors that could cause our actual results to differ from the forward-looking statements, can you read that?
As well as any reconciliations of measures we're required to reconcile to GAAP financial measures, please refer to today's press release, which is available on GapInc.com, as well as our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. Sorry, I have to do that. This morning, you'll hear first from Glenn Murphy, our Chairman and CEO, and then Sabrina Simmons, our Chief Financial Officer. In addition to hearing from Glenn and Sabrina today, you'll also hear from the Presidents of the following divisions: our International Division, Gap Inc. Direct, Gap North America, Old Navy, and Banana Republic. This year, the Presidents of Gap, Banana Republic, and Old Navy are also going to be joined on stage by their head merchants.
You'll have an opportunity to ask questions after each of the divisional presentations, and then Glenn and Sabrina will answer questions at the end of the day. After the formal presentations conclude, there will be lunch available in the lobby area where you registered, and we do encourage you to visit the showrooms if you didn't have a chance this morning to check out the holiday product that's set up. Following lunch, also to let you know, there will be an optional session. It's a presentation that will bring to life elements of how our new Gap Global Creative Center is coming together. After the conclusion of Glenn and Sabrina's Q&A today, I'll give you a few more details for those of you who are planning on staying for that on the logistics of that event. Lastly, a couple of things. Please turn off your cell phones today.
Also, on the back of your name badge, I'm not wearing mine, but the back of your name badge is the agenda for the day, so in case you want to see what's going on. You should also have received on your chair handouts from Sabrina 's speech. Those are also available to download on GapInc.com after the meeting. Today's presentations are being webcast, and an archive of the webcast will be available on GapInc.com in the Financial News and Events section. Lastly, we'll have a 10-minute break at around 10:20 A.M. The restrooms, for those of you who want them, are near the elevators. Since time is obviously limited today, if you could limit your questions to one per person asking questions so that we can get as many questions answered as possible, we'd appreciate it. OK, now I'm really pleased to hand it over to Glenn Murphy, Gap Inc.'s Chairman and CEO.
Thank you, Katrina. Good morning, everybody. Welcome to Gap Inc.'s Investor Day, and welcome to our new office, which is the Gap Global Creative Center, known internally as GC squared. It's not our only creative center. This is where all the Gap team from around the world works on our product, on our marketing, does the production for our product. We actually have other creative centers. We have one also in New York for Banana Republic for Jack's team. We have a creative center in Mission Bay in San Francisco for Old Navy. We have a creative center in Petaluma. We have a creative center, a very small and mighty and tight creative team from Piperlime also in San Francisco. While this is where we're having the meeting today because it's new and obviously there's a lot of questions about Gap, which is the reason why there's a few changes to our traditional format.
First, there is a voluntary breakout session after lunch on the 11th floor with Pam Wallick and Seth Farman, who are going to take you through the Global Creative Center. I think it's important, given the fact we made this fairly sizable change in our business about seven months ago, to get people together, assuming you have the time, to hear I'm going to speak first and then hear from them about what really was the intent, the strategy, and what is the outcome we're trying to get to by bringing all of the best talent from around the world into New York for Gap.
The other change to our format, in keeping a little bit about trying to get some emphasis on product and the creativity inside of our business, is that while I like coming up here and talking about strategy, and so do our brand presidents from around the world, what we will do today is have each one of our senior merchants that works for our domestic businesses for Gap, for Old Navy, and Banana Republic come up and present to you with their brand presidents and take questions. Those are two changes to the format. The last little change is because we've added that to the agenda.
Sabrina and I, who normally take up lots of time in these meetings, but we get a chance either one-on-ones, on conference calls, and in other sessions to be with a lot of people in the room that I recognize, we're going to be a little briefer than usual to allow the people in the front row to get some extended time and be able to answer your questions and let them tell you exactly what I'm going to speak to you about in a minute, how the strategy of the corporation goes from what slides I'm going to take you through, most importantly, to execution. That's what the focus of today's meeting is going to be about. Without any further ado, I think it's important to start off by saying, what is Gap all about? Who is the business? What are we all about?
It's really about, as we've been talking about for the last year, Gap Inc. is about sharing American style around the world. The key word in that for us is style, the interpretation of style across all of our brands. We're American brands, but the interpretation in Jack's business for Banana Republic and Tom's for Old Navy and Art's business for Gap, what is the interpretation? How do we come to market and make sure that the style component, the epicenter of what these brands stand for, come alive every single day inside of our business? The other thing I think that's important that differentiates us in the marketplace, we run brands, sorry, we own brands. We don't run stores. Now, again, for you as investors, you have to make a choice in this environment in which we're in. Would you rather be making investments?
Do you believe long-term that a store-run-based business will beat a brand-based business? We own brands. Three developed brands today in the ones I mentioned, two up-and-coming brands in Piperlime and Athleta. The business is about the American style component. That plays very well when we take our business outside of the U.S. When we go into China and go into Italy and go into our franchise markets, obviously the notion of American style, American culture plays very well. The lesson that I've gotten by the expansion of going from six countries to 34 countries in the last five years is we need many more competitive advantages than just our American style. What the brand presidents are going to speak to you about today, not in depth, but we'll definitely reference, what are the advantages we have? Because when we go into Italy, we're stealing market share.
We have to go in there and win and beat people who are established in that country. What we take back by spending the money and exercising our strategy around the world, what we take back into the U.S. is the notion that competitive advantages, why Gap, why Banana Republic, why Old Navy, becomes that much more important because we're learning that as we're going into new countries today. Next slide, Liz. Beyond the what, a big question that I think some people have every now and then, and we've spoken a lot about these meetings, is how? How are we going to win? What is the strategy the business is working on? We've been talking about multiple brands, multiple channels into multiple geographies. That's what the business has been referring to for the last four years since I've been your CEO. Multiple brands are critical to us.
This is a very fragmented industry and sector. I was telling this to Michelle Tan last night. The businesses I came in before were not so fragmented. Social demographic, people's personal styles, age, average household income, it's a very fragmented sector. The $1.4 billion apparel business is what it is. We therefore believe in a multiple-brand approach. We're committed to that. If we weren't committed to it, we wouldn't be putting the time and the investment into developing Athleta as the fourth brand and Piperlime as our fifth brand. Obviously that is the look the business has. Would we have a sixth brand down the road if something made sense, was complementary, we could be successful? It's something we consider. I'm only saying that because we're committed to a multiple-brand approach, making sure they're distinct. That's why you hear from Nancy today, Mark Breitbart, Julie Rosen, speaking about their brands.
Why are they distinct? The other part of the strategy, about how we're going to come to market, how we're going to win, is through multiple channels. The specialty channels, what everybody knows about, those are the stores obviously on High Street, the stores we initially opened up. The business long-term is about multiple channels, not just specialty, our outlet business, our online business, and franchising our stores around the world. We love this strategy for a number of different things. Key for us is what is the role of each one of these channels? Customer today, you don't have to do a lot of research. We do our research all the time. Like any other company, we spend money on research to make sure we're on top of what customers are thinking about. Today, one of the key comments that's come out of us is access.
Customers want to be able to access your brands any way they want. A lot of people may come through our specialty channel, but may start first in our outlet business and experience the brand. They may start online. We believe, as we look at the competitive landscape around the world, taking the multiple brands, running them through multiple channels, and lastly, running that through multiple geographies. There are 90 countries around the world we see ourselves in long-term. There are 90 countries around the world today we ship our goods to through a third-party arrangement we've made through Toby 's business. Inditex, a business we compete against globally, who we respect, operate in 82 countries today. We're in 34, and we're only near or at capacity in very few. Take the United States. We're still nowhere near capacity on Athleta. We're still nowhere near capacity on Piperlime.
We still have opportunities on the value expression of our brands, whether that be outlet stores or whether it be power center locations where we can put our factory stores in, which is really the outlet store, just called by another name. There are still opportunities in the U.S. This is the one market where we are the closest to capacity. You run all the way through from the left-hand side of the slide, to the right. Basically, an expression I learned in retail a long time ago is we have the flexibility in our strategy to put the right horse on the right course. All these multiple brands through multiple channels, through multiple geographies. Liz.
One of the other benefits of the strategy I just talked to you about, how we plan to come to market, is from day one, since the early days when I started this new management team on the front row started working together, we've been talking about how do we reduce our dependency on our specialty bricks-and-mortar business in North America. Call it about 80% of our business was in that bucket in 2006. How do we reduce our dependency? We did it by looking at not only what's right strategically and how do we win on the competitive landscape, but if you look at it on three dimensions, all four extensions of the specialty business win for us on customers, on growth, and economically. From a customer perspective, you can't deny the online business has always been a strong performer.
It outperforms the bricks-and-mortar business around the world by a long shot, depending on the development of the online business in each one of our countries. With the advent of tablets, you can see the online business and free shipping and other developments that Toby will talk about later on. We're seeing that delta between bricks-and-mortar and online growing even faster. Good for customers. International business. Good for us because we're taking and exporting American style, American brands around the world. In a lot of countries we go into, there is no American-based business the way we bring. We saw that in China. We're seeing that in Italy. We're seeing that in some of the other markets we're going into. Good for customers. New brands.
Obviously, if you look at the customer, for those of you who got a chance last night to go to Athleta or know much about Athleta, that's a business that customers want. They're demanding those categories. It's a lifestyle play married with performance. Obviously, that's good for customers. Lastly, the value business, a segment that's always grown. If you look at it around the world, the other day we were looking at numbers for Japan. Looking at the value segment in Japan from 2006 to 2009 to 2011, customers are making it very clear they want choice, they want access. All four of these are right for customers. Let's talk about growth. We know the growth in online. We know worldwide. We know here what's been established for more than three decades. Go back, Liz. Sorry, that's my fault. We know the growth that's available to us in international.
So far this year, Hong Kong apparel sales year to date up 26%. The month of September, 29%. You look at some of the countries we're going into, and this is not a condemnation of our home country, but we are making obviously clear predictions here. It's going to be a slow growth market. When we look at the markets we're going into today, big investments in China, and a lot of the investments Stephen's making in the franchise business in Indonesia, in Singapore, in Vietnam, in Cambodia, there's big growth opportunities for us internationally. We're just holding share in a lot of these countries could be double-digit growth. Good for growth. New brands, good for growth. Yeah, what a business. Performance-based product for women's. CAGR, over the last five years, 7% growth in a $30 billion business. Good for growth. Lastly, value.
As I said before, customers are voting for that sector. You can look at the winners so far this year. Because not enough of our business is in that segment, a lot of people at the top of retail in this country are value-based. Customers are voting, we have to move, we have to shift our square footage to the value bucket. Lastly, this is great strategically for us, and it's great for the economics of the company. I wish it was great for the economics of the country. I can't. I got my own problems. I can't solve that. Online. Number one in our business, great return on capital, great return on sales. Go back, Liz. Sorry. International business, franchise business, phenomenal return on sales, phenomenal return on capital. Our Japan business from day one has been a great return and great economic business for Gap Inc.
Our city strategy, yes, we got a little overambitious 10 years ago. People keep bringing that up to us in the U.K., in France, in other countries. Our city stores in Europe have always been very profitable with a great return on capital. The challenge for us right now is how does China look like Japan in terms of its return economically? You can appreciate we are, under Sabrina's leadership, putting a lot of time in to make sure that the P&L profile of our China business looks like Japan when it starts to mature. Great for the economics of the business. New brands. Really feel good about Athleta, what we're seeing right now. Very early days, somebody asked me last night, how do you move the needle with Athleta? I said the presentation today is not about how Athleta is going to move Gap Inc.'s needle.
The presentation today is we have a number of different initiatives in place that collectively will move the needle. Athleta, though, we feel very good about the percentage of its business online, the split of how it is economically, good for Gap Inc.'s economics, and lastly, our value business. Our outlet business is world-class when it comes to return on capital and return on sales. On three dimensions, our strategy for customers, for growth, and for the economics of the company's P&L and the use of its capital is very solid at the same time while reducing our dependency on our bricks-and-mortar specialty business in the United States. Now, Liz. Growing international and online. You've seen the slide before. I'm not going to spend much time. We have a clock going? OK, we're not going to spend much time on this.
You've seen before the outcome of what I just talked to you about. When it's all said and done, the outcome for us is to move. That's why we split our meeting today between our domestic team that's going to speak to you after the break. The first part of the meeting is about international from Stephen Sunnucks and online what's going on from Toby Lenk. We're looking at our business today, and we're measuring it this way. How do we go from 16% of our business in the year this new management team was formed and started working together to 30% in 2013, two years from now? We're committed to that number. Talking about strategically is one part.
On the dimensions I talked to you about, customers, growth, and economics on the P&L and return on capital, this is key to the company getting to that 30% number by 2013. Now, two things I want to talk about here. As I said, you're going to kind of hear two messages today, and hopefully they'll come out clearly to you when the teams come up, or you can tease that out through your questions. You're going to hear about growth, and you're going to hear what's in motion in the company. Back to my comment earlier that somebody said last night, how does Athleta move the needle? It's not the only needle we have. It starts with China. Steve will talk to you about today what our plans for China. We feel very good about China. Too early to declare anything. China is not easy. China takes patience.
You need to understand it. We're going to make mistakes. We've made mistakes like anybody else, but I think the mistakes we've learned as we move forward continue to strengthen the company's resolve that we are making absolutely the right call in investments in China. Franchise business. You're going to hear about that from Steve today. Big success. More new countries, more stores, more brands. Global online and outlet, back to the strategy. We introduced it in Canada a year ago. It's been a huge success. We've got it in Europe. It ships to 22 countries. We opened up in China day one with our online site. Opened up in Italy day one with an online site. Fourth, Italy. Steve will give you an update on that. Another European country going in, stealing share. Banana Republic in Europe. Opened up in Paris in November.
We've got our plans for the U.K. We've got further plans for France. We've got our franchisees who love Banana Republic. It's doing very well so far this year. Banana Republic is kind of that brand that at times, I know Jack and I joke about this, gets mentioned third. Jack's third in the presentation. Jack Calhoun. At the end of the day, Banana Republic and its position on affordable luxury is critical and playing very well in our franchise markets. We feel positive what's going to happen in France. We love the launch of London initially. Steve will touch on that. Athleta and Piperlime, you'll hear a lot from Toby on that. Lastly, Old Navy Japan, which it's on the list right now because it's in motion. We're trying to put the team together. We've got the strategy in place. We're doing the work through Tom Wyatt's team.
It's going to be a push model, highly leveraged. Tom and Steve working on it together. Now we're taking the big player we have, the big brand in terms of volume, hitting the value piece and a lot of the other strategic needs the company has. It's coming off the North American bench, and we're going to take it out to Japan in the next 18 months. That's critical to us because Old Navy Japan should be very successful in the market we're going to go into first. Then how does it build and become Old Navy International? One of the things that we get asked every now and then, and I certainly talk to the team in the front row often, is how are we feeling about the pacing and the sequencing inside the business? How do we actually get to this?
There's a lot of gates here that we have to go through. One is do we have the bandwidth? Do we have the proven execution? Do we obviously have the cash? Are we going to get the return for the investments we're making? This might look, depending on what side of aggressiveness you fall under, this may look like a very full list that we have in motion today, or you may be wondering if it's not enough. Knowing that the meeting today is not about a debating society, at the end of the day, this is what we feel comfortable about. Yes, it's pushing it more than we've done before. We put the teams in place. We make sure we have independent people running it. This is the growth outside of domestic that we feel good about.
The last thing I want to say too, in domestic, when the teams come up today, when you hear from Jack and hear from Art and hear from Tom, their job today and their job every single day is where's the growth in North America? It's the biggest market in the world. It's the most dynamic market in the world. It's our home market. We don't like the fact that we're not positive comping in 2011. What are we going to do about that in our home market? Toby will touch on today that as we got his team working on global online for the last two years, as we've redirected his attention to the business right now domestically, what are the things that his team can do to help us drive growth in North America? There's a domestic component you're going to hear about today.
What you're not going to hear about today, because it doesn't pass any filter of sequencing and pacing, is everything on the right-hand side. I'm only flashing this to tell you the company has a very long runway of potential growth. This is just a sampling of where we could go down the road, whether that is in the 2012 Investor Meeting, 2013, 2014, 2015. I don't know today. Let us manage what's in motion. Let us do that. Let us execute that very well. Let's get that established, and then we'll turn our attention to what may be in motion down the road, but not for today. Lastly, delivering on products. Again, two big themes today: growth and products. That's why we have our merchants here meeting with you today. I don't want to take too much of their thunder.
If they give me the chance, I'll take all of it. When you hear from Nancy Green, when you hear from Julie Rosen, when you hear from Mark Breitbart, we need to deliver on product. I was talking to somebody earlier today. If you believe in the strategy, if you believe the company, and I'll get to the economic model in a second, have put the economic model in place to deliver the kind of returns this business has seen four years in a row up until 2011, then when we run the product through that strategy and through that economic model, the product that is absolutely right for the customer, the positioning we take, it's right every single day. It's not just delivering product. It's delivering product consistently. Anybody can be a winner in a quarter. Anybody can have a good season. Consistently is what we have to do.
The people who are here today speaking to understand that is paramount. It's a non-negotiable. There are three key areas we've been spending with our merchants, with our designers in the last six months: customers, talent, and product model. Customer is tough. I mean, whatever I always tell the team, whatever was great in 2006 is good in 2011. Great doesn't cut it. Whatever your view of great product was in 2006, a lot of the people here today, designers who work in our business, in Gap, in Banana Republic, in Old Navy, in Athleta, in Piperlime, anybody who's been in this business for more than seven years, forget what you thought was great in 2006. It doesn't cut it anymore. You've got to be beyond that. This is the challenge for the team, and it starts with you better know your customer. Now, that's a motherhood statement.
Of course, we know our customers. Do we spend as much time as we used to? Do we spend more time than we used to? Yes. We put more time, more energy, more money in the last six months to making sure we're in front of our customers and talking to them so we can get to the new definition of great. Do we have the talent? We're just putting three people in front of you today. We have hundreds of people in our design teams, in our merchandising teams, in our marketing teams. Do we have the talent? We have made some tweaks in our talent recently. It's going to happen. Everybody's going to do that. The best companies are always in the search for the best talent. Do we have the right talent?
Today, we're putting not only the Brand Presidents, but their merchants in front of you to speak about what are they doing. Do they have the talent in their teams? We've made some changes lately, but we're always looking to make sure we have the right talent. Lastly, our product model is being challenged. We told you at some meetings in the past that this is a company that believed for the longest period of time that more time meant great product. It took us a while to break that paradigm in the company. More time doesn't mean better product. Closer to the market, closer to the customer, faster means better product. What we've done on speed, as you'll hear a little bit today because they only have so much time, is we've created that incremental pipeline.
We shrunk the pipeline we had on product development down by quite a bit. We've added another pipeline. The goal now of the merchants working with the design teams and other people and the field leaders is to feed that new faster pipeline. Closer to the customer, better decisions. Better decisions on trend. Better decisions what's right for us. By the way, that's not the only change to the model. Incremental categories. We can't live by the categories we have. You look at the greatest retailers, brands out there today who are really winning, winning around the world, their ability to introduce categories their customers want that fit who they are, fit their aesthetic, they're people who are winning today. We have a missed opportunity. You're going to hear some of that today about how we're putting new categories in our business.
Lastly, we're no longer going to hold on to the notion that we have to be 100% vertically integrated. There are other brands. You saw a little bit in Athleta yesterday. Toby's business started that way. There are brands who would love to partner with us. There are complementary categories. There's categories we're saying to ourselves, it's not our core competency. It's not who we are. Every minute somebody spends on a category like that that's not being put into what we're great at and what we're going to dominate at takes away from that category. We are spending quite a bit of time as a business speaking to a lot of third-party brands. Who wouldn't want to be in 1,000 Old Navy store seats? Who wouldn't? Pretty much nobody so far we've talked to. We've just got to find the right brands. Do they fit?
Put them into our stores. Now, as a segue to bring Sabrina up, let me flash the P&L. Not all Sabrina does, but it is one of her top duties. All I want to do for today is I want to say two things about this. Are we happy with the performance we put out so far in the first half of 2011? The answer is no. We're not happy with our performance in the first half of 2011. I do want everybody in the room, and maybe this is a little self-serving, for four years, from 2007 to 2010, this business increased its earnings on earnings per share on a CAGR of 19%. This business hit a 13.4% operating margin in 2010. It grew and improved its performance every single year during three, you have to admit, three of the more difficult operating environments you can have.
In 2010, we had significant, we don't give the number out, we had a significant amount of investment income in the 2010 performance to create 2011. To create the growth in motion I showed you, we had to invest money in 2010. That's in that P&L that you're staring at in front of you. 2011, here's the one thing I can be critical about, and it's self-criticism. I allowed the cotton crisis to become a distraction inside the business. That's my fault. We lived through crisis in 2008. We lived through crisis in 2009, and we overcame it. The performance speaks for itself. It's a matter of record of fact.
In 2011, when another challenge came our way, which we didn't see coming, and obviously you know the whole history about the company, its investment in cotton, how investment cotton-based we are, our value business, when it hit the company, I allowed that to become too big a distraction for the people you're going to hear from today, for the designers who are not in the room today. It became a distraction. My job is to keep people focused. Going forward, what I can tell you is as we've regrouped as a team and talked over the last three to six months, I want to tell you the team you're going to see today is focused.
The team you're going to see today appreciates the results the business needs to deliver, appreciates the kind of company this is, and the kind of potential and profile that we have that a lot of other businesses would kill to have. Strategy in place, yes. Execution stepped up in terms of the focus that people in the business have, absolutely. The focus has never been sharper. A big part of this is the focus of not allowing things that are going to come our way to ever be a distraction. Cotton wasn't this little thing. It was a significant thing, but we allowed it to become a distraction. I hope what you see today when you listen to the people about to come up is we are focused. We know our brands. We know our advantages. We know how we're going to win. That's the big message I want to pass on to you before bringing up Gap Inc.'s CFO, Sabrina Simmons. Sabrina.
Good morning, everyone. Thank you for joining us today. As Glenn just said, after delivering earnings growth over the last four years with a compound annual growth rate in EPS of about 19% and cumulative free cash flow generation in excess of $5 billion, our management team is disappointed in our 2011 financial performance. Though there are several bright spots in our portfolio, the impact of cotton inflation in our business has been significant, and our comparable store sales performance has not been consistent enough. Despite this, we are reaffirming our full-year EPS guidance of $1.40 - $1.50 for the year. As we focus on rebuilding our financial performance, we remain committed to our long-term strategies. As we invest, we continue to demonstrate expense discipline, and our cash flow generation remains healthy.
Our commitment to returning excess cash remains as strong as ever, as evidenced by our distribution of $1.5 billion in the first half of this year alone. Today, I want to cover how we intend to deliver shareholder value as we pursue our strategies in 2012 and beyond. Our primary objective is to drive value by resuming operating income growth and supplementing that growth with our financial strategies, namely share repurchases and dividends. Our economic model is simple: grow the top line, re-expand gross margin, maintain expense discipline, expand our operating margin, distribute excess cash, and grow earnings per share. Let me now quickly take you through some of the key components of the model. Let's start with sales. Given the size of our revenue base at nearly $15 billion, moving beyond 2011, we believe a low single-digit total revenue growth is a reasonable goal.
All of the brand presidents will cover their specific strategies for delivering on their piece of this growth. Before I turn it over to them, let me take you through the important areas of focus in delivering the growth for North America and international, broadly speaking. Starting with North America, at about $11.4 billion in 2010 sales, Gap, Banana Republic, and Old Navy are largely mature in North America in terms of store footprint. As we move past 2011, even on its large base, we do intend to modestly grow total North America sales through a smaller, healthier specialty store fleet supplemented by sales growth in our online and outlet channels. Given its importance, I'd like to spend a few minutes on real estate.
Our primary objective for our North American divisions is to improve the productivity of our square footage, not only through consolidations and closures at Gap Specialty stores, but also through downsizes at Old Navy. These square footage reductions should increase productivity and allow us to shed rent and occupancy costs with the goal of ultimately making each box more profitable. In 2008, we set a goal to reduce North America square footage by about 10% by the end of 2012. We've made significant progress to date. Let me give you a few specifics. At the end of 2007, Gap Specialty had 1,056 stores on 10.3 million sq ft . As of the end of the first half of 2011, Gap Specialty is now at 889 stores and 9 million sq ft , reductions of 16% and 12%, respectively.
By year-end 2013, our goal is to bring the Gap Specialty fleet down to about 700 stores, which represents a full 34% reduction in the Gap North America specialty fleet since 2007. We plan to supplement our healthier specialty store fleet with growth in our high productivity and high contribution outlet channel, as we plan to add about 50 new outlet stores over the same period. By year-end 2013, we expect this rebalancing will bring our total Gap North America fleet to about 950 stores. In contrast to Gap Specialty, for Old Navy, the focus is on downsizes concurrent with remodels. As we downsize our stores, our goal is to maintain the sales in a smaller box. At the end of 2007, Old Navy had approximately 20 million sq ft .
As of the end of the first half of 2011, with nearly the same number of stores, square footage has decreased by 8% to 18.5 million. We believe there's an opportunity to take out about another 1 million sq ft by year-end 2013. Driven by these actions, through the end of the first half of 2011, we've reduced North America square footage by about 7% on pace to achieve our goal. Let me now turn to international. As you know, we've been operating outside of North America for over 20 years. Historically, we only deployed our full-price retail channel internationally. As I told you last year, going forward, we're complementing our specialty stores with our higher returning outlet and online channels. It's this combination of channels that should deliver healthy returns. Additionally, we have a high return and fast-growing franchise model that we launched five years ago.
At the end of Q2, we had about 200 stores in 26 countries. Typically, we prefer to own and operate our stores in larger countries like China, where the sales potential is substantial and where we can therefore leverage a fixed infrastructure. We tend to deploy the franchise model in smaller, more complex markets. As a reminder, our franchisees are required to purchase all products from us at wholesale. In addition, they pay us a royalty. To summarize, our objective is to grow sales modestly in North America on a smaller, healthier store base, supplemented by growth in the outlet and online channels. Internationally, we plan to complement our specialty store growth with our higher returning outlet and online channels while we continue to grow our high-return franchise business. Turning now to margins. Our merchandise margins are down significantly in 2011, driven by the sharp escalation of average unit costs.
As a reminder, a large part of our portfolio is in the value segment, namely Old Navy and the outlets. This heavily cotton-based segment got hit the hardest in terms of percentage increase of costs, given their low absolute cost base. It's also the segment for which we chose not to raise prices commensurate with costs, given the impact of the tough economy on our customers. However, we anticipate future re-expansion of merchandise margins enabled by normalized cotton prices. The biggest opportunity for this begins in the back half of 2012, as we lap purchases that embedded peak 2011 cotton prices. With regards to operating margin, we intend to return to the operating margin levels we achieved in 2010 over time. This will be driven by the re-expansion of our merchandise margins, which I just discussed.
Having gone through the P&L, let me now turn to cash and our financial strategies, since EPS growth will come not only from a combination of revenue growth and operating margin expansion, but also from our financial strategies. Over the last four years, average free cash flow has been nearly $1.3 billion per year. Our stated priorities for uses of cash are first, reinvestments in our business to the degree we have projects that will deliver appropriate returns. Second, increases to our dividend. Third, share repurchases. Our capital spend, which is our first priority for cash, is focused on North America remodels that accompany square footage redemption, international store openings, especially outlets, and the IT investments that go with it, Athleta store openings, continued growth of our global online business, and targeted investments.
Turning to cash distributions, our strong cash flow and balance sheet have enabled us to grow our dividend. Since 2004, we've increased our dividend five times to $0.45 per share, representing a current yield of about 2.5%. Since 2004, we've paid our shareholders over $1.5 billion in dividends alone. Even after capital spending and dividends, we still generate excess cash. We continue to consistently deploy excess cash toward our third priority, share repurchases. Since 2004, we spent about $10 billion repurchasing about 530 million shares. In closing, while 2011 is a difficult year, we are more committed than ever to drive our economic model going forward. Specifically, we will remain focused on growing the top line through modest positive comps and growth vehicles that deliver solid returns, returning our operating margins to its earlier highs over time, generating strong earnings growth, and distributing our excess cash. Thank you. Now I'd like to turn it over to Stephen Sunnucks, President of our International business.
Thanks, Sabrina. Good morning, ladies and gentlemen. It's a real pleasure to be with you here again. I'm Stephen Sunnucks, and my job is to grow our brands all around the world for the long term. I came here more than five years ago to lead our European operation. In 2008, I took on responsibility for our franchise division. Early this year, I assumed responsibility for our combined international businesses, that is Europe, franchise, Japan, and China, based out of London. I'm responsible for the whole of our stores business outside of the United States and Canada. I share responsibility with Toby for international online. I've been in apparel retail for more than 30 years. I joined Gap because I saw the fantastic potential for our brands internationally. We have a simple task in international.
It is to sell more products in more countries to more people through more channels using all of the Gap brand. We've put together a strong international leadership team, and we are confident that we can deliver sustainable long-term growth for this business. Today, I'd like to tell you how we've been getting on since we last met, to share with you our current view of trading, and to explain how we're going to realize the potential for this long-term growth. I will concentrate mainly on our geographical expansion and how we see that developing. Brands and online will be covered in more detail by my colleagues later in the day. First, to put international in context, let's just remind ourselves about the opportunity. The global apparel market is worth some $1.4 trillion. About 26% of that market is in the U.S. and Canada, and 74% international.
At Gap Inc., we're the other way around. In 2010, excluding online, we had about 86% of our store sales in the U.S. and Canada, and only about 14% in international. That gives us a lot to go for. Let's look at our progress so far. Last year, excluding online, we saw sales rise 11% to almost $2 billion. Our comps were positive. We opened a further 67 stores, including franchise, taking our total to 531. We entered six new countries, taking our total to 29. We now ship to over 90 countries online. We achieved that growth while making strong capital returns, seeing an internal rate of return well above the company's cost of capital. This year has been more mixed. On the one hand, we've seen some excellent sales growth, up 11%, including online, in the first quarter, and 21% in the second quarter.
That puts our first half sales up 16% overall. The reason for this is that we have had some excellent performance from our new stores, and particularly those in developing markets. For example, there has been a resurgence in the Middle East, opportunities in Russia, and there's strength in Asia, in China, Korea, Singapore, and Australia. However, on the other hand, despite those strong total sales, our comps have been more challenging. They are down 5% in the first half, and we've seen a tough start to autumn, particularly in Europe. Now, for the last four years, international comps have exceeded those of Gap North America. What has changed? Two things have changed. First, the product is not as we want it, particularly in women's wear. Some of the offering has been too basic. It hasn't been enough on trend.
International customers are looking for something more fashionable and more aspirational. Pam and her team are working on that, and you will see that later today. Secondly, we have to factor in some severe short-term headwinds in our two biggest comp markets, which are the U.K. and Japan. Together, they represent around 85% of our international company-operated comp store base. The U.K. has had a rough time through the recession. With rising inflation, there has been a severe squeeze on income. The result is a downturn in consumer confidence, and therefore on spending. This has affected the whole of retail, and we believe it will take a little while to turn around. As for Japan, since the earthquake, consumer spending has been very fragile, and therefore short-term adverse effects, such as the exceptional warm weather and typhoons in September, have had a significant effect on our business.
A combined challenge of poor product and these short-term headwinds in our two biggest markets have made business volatile and taken us into negative comp territory. To offset these headwinds, we have maintained tight control on expenses. We work out of lean regional offices. We've closed underperforming stores, and we are even more focused on inventory management. In the light of this, you can see why it is so important to mitigate our historical reliance on these two markets. Indeed, once we look outside the U.K. and Japan, we see a very different pattern. In developed markets, we are following a strategy of carefully targeted growth. Italy is a good example for us and has worked well. We're seeing more momentum and a positive performance from our developments in emerging markets. There's been a lot going on in the Middle East, and that has been good for us.
Last time we met, for instance, Dubai was going through a financial crisis. Now it's back. We see terrific opportunities in Russia. It's strong too in Asia, in China, Korea, Singapore, and Australia. Our ongoing international strategy is very clear. We will continue to grow through existing and new geographies, expanding our channels and introducing our brands while optimizing our financial returns. We begin by opening brand-building flagships in major high-traffic city destinations. At the same time, or shortly after, we establish an e-commerce channel. We follow with smaller core stores in surrounding cities and with outlets. Putting these together, our goal is to optimize our reach and our financial return in any given market. Store by store, we shift the way our sales are balanced between the U.S. and Canada and international. Here are some of the new flagships that are building our brands. This is Ginza in Tokyo.
It attracted a foot flow of over 30,000 customers in its opening weekend in March. That's nearly double our previous number one flagship in Harajuku. When we moved into Kyiv, the capital of Ukraine, with our franchise partner, we literally had hundreds of people queuing in 90° heat. Our staff were even having to hand out bottles of water just to keep them cool. Here's the first fantastic Gap in Rome. Sales for this store have been consistently in our top 20 in the fleet globally. This is the interior. You can see how we take the architecture of the building, like this original mural, and treat it locally as part of our denim story. Coming in just a few weeks, Hong Kong. A wonderful site in Hong Kong's central district, which is still growing in prominence as a cultural shopping and entertainment destination for the city.
Here you can see how we use the brand consistently in the exterior of all these various architectures. That's what we call global. In the interiors, we have to pay respect to local. You see we style the interior differently here in Japan to that in Italy. This map shows how we prioritize investment as we continue to diversify our business by geography, by brand, and by channel. These are the IMF's latest economic growth forecasts for 2012, issued just a few weeks ago. You see here in purple the developed market. They still have the greatest scale, 64% of worldwide GDP, but they are forecast to grow more slowly, in aggregate at around 1.9%. Going into these developed markets, we take a very targeted approach. Our brands are well regarded, and we place them where they will have optimal impact.
As we have seen, when we went into Italy, for example, we went into large, affluent, cosmopolitan cities like Milan and Rome with brand-building flagships supported by outlets and online. It is here in the emerging markets, here in blue, where we think we will see the biggest growth. They represent about 36% of GDP, and they are forecasting to grow on average at more than 6% per year. This year, in our franchise business, we will open 65 stores in nine new countries, almost all of which will come from these emerging markets, and putting us right on track to grow to 400 stores by 2014. Of these emerging markets, the largest is China. There is a huge amount of country news about China daily. For us, China remains a really significant opportunity. It is the second largest apparel market in the world.
It has more than 110 cities with a population greater than 1 million people. Although forecasts vary at the moment, it is still set to grow at a faster rate than other economies. We launched in 2010 with four flagship stores in the major cosmopolitan cities, two in Beijing, two in Shanghai, and we will launch in the third major city, Hong Kong, in just a few weeks' time. We have also invested in the infrastructure needed to grow with our regional office based in Shanghai. We are excited about that. We're excited too about the response to our e-commerce business. We now have two sites in China, a dedicated Gap e-commerce site run by a third party, and Taobao, one of the most heavily trafficked internet destinations in China.
We're seeing orders from as far away as Harbin in the north and Chengdu in the west, with very positive customer reviews. That is an indication of the potential for our store growth in other regions. During the second quarter of 2011, online orders came from all over China, covering provinces, municipalities, and the autonomous regions. Many orders came from Hong Kong and its highly international population. The good thing about that is that when we open our first Gap store in Hong Kong, we shall do so with the benefit of strong brand awareness. Brand awareness is crucial to a new retailer. In China, we built it fast. We were helped by a strong, exclusive marketing campaign, which we called Let's Gap Together. This was an East meets West creative visual idea where we put together artists, models, and musicians.
They connected our heritage brand with a modernizing and optimistic energy that characterizes China's new generation. The effect was powerful and resonated highly with our Chinese customer. Post-campaign feedback was very positive. More and more people are now wearing the Gap logo on the streets of China's big cities. They are proud to do so, and that says everything about the brand. 2010 was all about building brand and infrastructure. Following that, this year is about opening more stores. We've made a good start, and we're pleased with our performance so far. Today, we have eight company-operated stores in Shanghai and Beijing, and we are forecasting to have 15 by the end of this year. In addition, we're expanding into other cities. Specifically, Hong Kong, Tianjin, and Hangzhou will open later this year.
With populations of 7 million, 13 million, and 9 million, respectively, these cities demonstrate the opportunity for our brand right across China. As I said, there are more than 110 cities with a population of over 1 million people. This year alone, we're forecasting to be in five of those cities with a total of these 15 stores. We're targeting another 30 Gap stores next year, bringing the total to 45 stores. That's just the beginning of our long-term expansion. We will also explore the opportunities for our other brand and other channels. I hope I have conveyed the excitement of the scale and potential as we grow our business geographically. Here in this diagram, you can see the results so far.
You can see that we have made real progress and increased our mix of non-U.K. and Japan stores, company-operated and franchised, from 14% in 2006 to 42% last year. Following on from geographical expansion, I want to now touch just briefly on our brand and channel opportunities. Brand and channel are vital because our big opportunity lies not only in building the Gap brand geographically, but also in introducing and then growing all our brands and channels. This chart shows international revenue as a percentage of total brand or total channel sales, and how the Gap brand is already a truly global player. For instance, while international represented just 14% of Gap Inc. total store sales in 2010, it represented around 32% of Gap brand sales. Look how small the business is for our other brands, with Banana Republic at around just 7% and Old Navy not yet launched.
Our outlets and online channels also have similar opportunity. Let's just quickly look at Old Navy because Old Navy currently only exists inside North America. With the growth of demand for value players globally and the rise in this consumer behavior of shopping between premium and value brands, Old Navy has an amazing opportunity ahead. We are planning to launch internationally, starting with Japan. This means Japan will be the first country outside of North America that offers consumers all three of our major brands. This truly diversifies our business. Banana Republic too continues to grow with our brand-building flagship launch in France later this year on the Champs-Élysées in Paris. Outlets are growing with more stores in Italy, and online is building on its early success, as Toby will show you in a moment. To sum up, I want to emphasize the strategic approach that we are taking.
It is to grow through geographies, through brands, and through channels that we will deliver a high rate of financial return. Along the way, we will develop a whole new set of operational efficiencies in IT, in logistics, and in purchasing. In geographies, we are looking at our targeted approach to our developed markets like Italy. We have highlighted the enormous potential in the emerging market, particularly in China. The story of brand is one that begins with the success of Gap. This success, in turn, shows us the potential for Banana Republic and for Old Navy. I have spoken only briefly about channels, outlets, and online. It is important to remember how strong their capital returns are and how they are crucial to extending our reach to new customers.
Whilst the U.K. and Japan are tough right now, we are protecting our brand and continuing to invest in these important long-term markets. We have a clear, bold strategy. There's plenty of opportunity. Our brands translate well into worldwide markets. We are confident that our approach will deliver strong long-term financial return. Finally, I want to show you a short video because I want you to have a real sense of the buzz, the excitement that accompanies the opening of one of our new stores. It's this buzz that I believe Gap is creating throughout the whole of our international expansion. Thank you.
What an incredible skill, what an incredible story experience. What just a massive team effort, as you see. I just want to say a huge, huge thank you to me and all of the leadership team, everyone who's been involved. Ciao Milano. Let's go for it you.
Good morning, Sid. We're really, really thrilled. We had a great event last night, and we've got a great team here. A very nice launch to the customers. We have time for just a couple of questions for Stephen. Just a reminder, if you could limit your questions to one per person so we can get as many questions as possible, that would be great. Oh, Tom, yeah.
Wait. I'll see relative to the comps, so pricing. Relative to the competition and relative to here in the U.S.
Yeah, clearly, I mean, our pricing strategy is a competitive advantage. If I can talk to you broadly about the opportunity that we see, we price alongside the brand that we see we need to compete with in a market. We're a consumer-led pricing strategy. How it compares to the U.S. obviously is not the first thing on our mind. We look at, in Italy, we'd look at a key competitor like Benetton, like Zara, and H&M. We're priced competitively against them. If we go to Japan or China, we'd look at the similar competitors. I'm not sure what more I can say to you other than, you know, we price according to the consumer and according to where we think we need to be competitively to win.
That's right. Yeah, Adrienne.
Yeah.
Oh, sorry.
Can you talk about some of the infrastructure requirements as you move from your current base of stores and kind of move forward? What types of distribution centers do you need for Europe? How many do you need in Asia? How many countries, store or store-owned, I suppose, because of the franchise differential, could a distribution facility service?
Okay. Yeah, I mean, I think if we look back to the beginning of this year, we just created the International division. To give you a little bit of background to the team that we've built, I have eight direct reports. The way we're organized is I have four, one by geographical head. I have Managing Directors in Japan, in China, in Europe, and one for Franchise. That's those four. The other four are focused, I think, on your question, which is about infrastructure. I have a CFO for International, I have a Head of HR, then I have a Head of Ops and a Head of Product. What we're looking at now with bringing the divisions together is, for the first time in some while, what are the synergies we can now look at globally? To your point, particularly we're looking at distribution.
Can we have what we're talking about in terms of regional inventory? Can we start to think about building hubs in Asia and maybe in EMEA, so Europe, Middle East, and Africa, to service our businesses as we join it up? Early stages, but your question is the right one as we start to build the infrastructure.
Right now, everything is coming out of the San Francisco DC?
No, it doesn't. No, today it's shipped straight from vendor to local DCs in the country.
Okay.
The U.K. is serviced out of Rugby, which is in the middle of the U.K. We have a distribution center in Japan, obviously Hong Kong for China, and so on.
Thank you.
Any other questions?
Just to follow on.
Sure.
You talked about a third-party provider in China for the internet business. Is that the strategy until there's a critical mass where you can justify building your own DC?
It is. Yes, it is.
Is that both for internet and for the bricks and mortar stores?
Sure.
That's using a third party.
The bricks and mortar stores, we own and operate ourselves. The online business is a third party, which we will, as you say, transition over time to our own platform.
That's not only China, but as you look further afield over the next several years?
Yeah, I mean, we've actually phased our online. The European business is owned and operated online, and Japan is coming. China is today third party. We're gradually sort of moving out from the U.S. with our online business.
Will the online support all the franchise operations as you continue to go further afield?
Yes, it will. I mean, I'm sure Toby will, I don't want to steal his thunder, but he'll talk to you in a moment. We have a push model at the moment over the U.S., most of our franchise markets. Certainly, I think the next step would be to partner with some of those to build in-depth online businesses in the countries which are relevant. Yeah.
Great. Thank you.
Okay, we have time for one more question. Yes? We want to wait for the mic.
Thanks. Yeah, just on the international side, you spoke to a tough start in Europe. Is that sequentially or every year? Can you qualify that or quantify that a little bit more with what you're seeing thus far in fall?
Yeah, I mean, our September comps were difficult. That's what I was referring to in fall.
Just through September with what you were discussing?
Yeah.
Okay.
I mean, the third part.
From a regional perspective, is it still U.K., or can you quantify a little bit more on Italy as well?
Yeah, we don't break out our country by country, but I think it'd be fair to say the U.K. is probably the toughest of the Western European economies at the moment.
Okay.
Yeah.
Thank you.
That was quick. We might have one more. Oh, sorry. I think there's one over there. Yes.
Hi, I was just wondering if you could give us an idea of how long it'll take the business to scale with all the investment you're making in the store openings in many different markets to scale to a level of contributing or advancing towards company average operating profitability. Thanks.
Yeah, we don't give out company operating profitability by division. I think what I can say, I said earlier that we're more than paying off for ourselves in terms of our internal rate of return and our return on capital. The business today is profitable. I said that last time. It still continues to be profitable. We're building for the long run. I think if you look at the key messages here, there's huge opportunity. Only 14% of our business is international against that 76% for the market. We've got some fantastic brands that you'll hear about in a moment where the American style is really resonating. You've seen Milan, the fashion capital of the world, arguably, and the response we had when we came in with Gap. We've got, of course, Old Navy and potentially the other brands in due course. The business is profitable and we're delivering good rates of return on our capital.
Great. Thank you, Stephen, for your time.
Thank you.
Now I'm going to invite on stage President of our Gap Inc. Direct division, Toby Lenk.
Excuse me. Let's see. I don't know if somebody left this behind. I'm going to move it over here. It doesn't distract me. I want to start off by kind of going back to last year. For those of you who were here last year, you recall I started off by talking about our financial results and laying out a long-term financial goal. Last year, we had just finished our prior year of 2009, which was $1.1 billion in revenue and $252 million in operating income. We laid out our long-range goal to reach $2 billion in revenue and $500 million in operating income by no later than 2014. What I want to talk about today is how are we doing since then, since I laid that out last year and where have we been?
We finished, as you can see in the chart, 2010 with $1.3 billion, up from $1.1 billion in 2009, and $302 million in operating income. That was a great step forward. It was about 16% top line growth in 2010 over 2009 and 20% bottom line growth. In our first half to date, we've grown our top line about 19%. Again, another strong step forward. I can say that given how the first half has gone and given what we're seeing in Q3, we expect we'll reach about $1.5 billion. I keep dropping my bottled water. That's funny. Nobody's laughing now at me. We'll reach about $1.5 billion this year. $1.1 billion, $1.3 billion, $1.5 billion, continuing to climb the staircase toward our goal of $2 billion.
The big headline today is I want to strongly reaffirm that we are solidly on track to reach $2 billion in revenue and $500 million in operating income in Gap Inc. Direct by no later than 2014. I want to now talk about some of the highlights of our progress toward that goal in 2011. First, I want to talk about international. Last year, 2010 was what we called the year of going international. This is sort of the first year after the year of going international. I'm going to give you some specifics on that. First, just to remind everybody, we launched last year locally in Canada with local fulfillment for Gap, Banana Republic, and Old Navy. We launched in Europe local fulfillment and e-commerce for Gap and Banana Republic. In addition, we began shipping to about 90 countries from all of our U.S. websites.
All three were very big initiatives for us last year, the year of going international. This year, we continue to invest in capacity and capabilities on all those three lines of business. We expect that this year we will cross about $100 million in revenue from those three initiatives in their first full year of operations. We launched those about halfway through last year. This year, in our $1.5 billion, about $100 million of that, we'll cross that this year in those three initiatives. We're really happy. That's a very strong start to go from basically nothing to $100 million in our first full year of operations. Great progress on an international front. I want to talk next about everyday free shipping. We launched this last year in Q4.
Our research showed us that the customer was going to respond very positively with that to drive incremental sales both right now and then longitudinally over time. I can say that the results, as we track them internally, have been very positive. We're very pleased with this. It is an investment. It impacts our top line revenue. The 19% revenue growth in the first half is weighted down by lower shipping revenue year -over- year. At the same time, it also powers merchandising net sales and growth within that. There are two things going on in there within that 19%. It is an investment, but we're very happy with the payoff that we're seeing from that investment.
The other thing I might add is everyday free shipping is really becoming a standard in the marketplace. It is inevitable that multi-channel retailers are going to all go to that if they haven't already. We've gone, we went last year, and we're very happy with the result. Next, I want to talk about Athleta this year. Obviously, the big story there is Athleta stores. That's the big thing I want to spend some time talking about. First, I just wanted to tell everybody exactly why we're opening Athleta stores. It's very simple. The customer has demanded it. She's been very clear with us. Both our existing customers and prospective customers, they want to try these products on in a store environment. The performance characteristics, the fit, the function, the fabric, she really wants to try it on.
We've got lots of prospective customers who get our catalog, but they just don't want to buy this category direct. They've asked us to open stores. Our existing customers have asked us to open stores. We have opened stores. We first opened our test store in Marin. We followed it up with our first flagship in San Francisco. Very strong sales per square foot. Very happy with those results. We've begun lapping our test store in Marin. Strong year-over-year revenue gains. We know from the first two stores something very powerful, that we take $1 of direct sales in the area we open up a store in, and we turn that into $5 of sales when we have direct plus retail. That is a very powerful statistic.
With very minimal channel shifting from direct into the store environment, it is very accretive, and it shows us we have a lot of growth potential from converting Athleta into a multi-channel retailer and satisfying that customer need that she's been very vocal about. We're targeting locations very carefully. This, of course, is the Upper East Side, which some of you were probably at last night at the reception. We use our customer data to give us a heat map of where the best locations are to open. We've also opened up, as you know, the West Side. Those are stores three and four. The fifth store we've opened is in Orange County in Southern California. We've got five open right now. Four more are going to open by the end of November. One in Georgetown in D.C., Philadelphia, Minneapolis, and another in the heart of Los Angeles.
One additional one will open up toward the end of the quarter, a little north of here up in Westchester. That will bring us to 10 stores open by the end of this fiscal year. I'm going to talk more. I'm going to talk about 2012, about the GoForward rollout plan. I'm going to talk more about the operating model and the economics of our store growth plan for Athleta. Suffice to say, we're very, very excited about the potential here. Next, I want to talk about Piperlime. The big story there is our expansion, continued expansion into apparel. Piperlime started as just a shoe store for us, and now it's much, much more. We've expanded the apparel assortment for women's a lot this year. We've worked to create broader price points from lower price points, entry price points to aspirational price points.
We've worked very hard to expand and complement the assortment of our horizontal brands with some private labels. We are now starting to convert Piperlime a bit into a hybrid model. It's always going to be anchored in fantastic horizontal third-party brands at the majority of the sales. We are now starting to mix in selectively private label brands to target particular price points and aesthetics to really round out the line and provide a compelling and differentiated assortment. We also continue to have success with vendor-exclusive styles we can secure and also partnerships like the successful LMOs from Piperlime, and also by targeting small undiscovered specialty brands in the marketplace that we bring to life on the site, all of which gives us a very special and unique and highly targeted assortment. You can see some of the image we have in our marketing campaign running this fall.
Some statistics, we expanded the Piperlime women's apparel assortment by about 50% in terms of styles this year so far. The apparel sales have grown significantly more than that percentage. That expansion and that strategy is working very, very well. With that expansion, with continued marketing investments, Piperlime remains our fastest growing U.S. online brand. I want to talk next about ship-from-store pilot. Some of you may recall we talked last year about the fact that we'd be launching a pilot of ship-from-store technology in Q1. We launched that on time. Just to refresh, that was to hook up 25 Banana Republic stores to our bananarepublic.com U.S. website. What that means is we take the inventory from 25 Banana Republic stores. We took it, integrated it into the site. It was available to sell to customers.
It allowed us to stay in stock longer, drive incremental and capture incremental demand by having more inventory. We then take that demand and we send it out to the stores where the associates pick it, pack it, and ship it to customers' homes. When we launched it, an interesting thing happened. We got way more demand than we expected, more demand than we wanted to comfortably send to our 25 Banana Republic stores. We tapped it down a little bit, and then we took a step back and said, you know what? We probably need to architect this technology to scale to possibly hundreds of stores. We took a step back, and for the last six months, we've been working to architect it to do that. Over the next few weeks, we're going to now roll to about 150 Banana Republic stores with this technology into Q4.
We're going to open up 110 Gap stores to integrate into Gap.com with this technology. We're also going to open up the 10 Athleta stores we'll have by the end of Q4 onto the technology. We'll have about 270 stores hooked up to ship-from-store technology in Q4. Likely in 2012, we will explore and test integrating some Old Navy stores into the technology as well. I'll talk more about that in a little bit, but we're excited about the potential, and we've made really great progress there this year. I want to talk about mobile now. Everybody knows smartphones are really changing the game in mobile. Heading into this year, we launched our next generation mobile e-commerce shopping platform. It was a major step forward in improving the customer experience. The form factor of a mobile is quite different than a tablet or a PC.
You must adjust the platform to make it easy and shoppable for the customer. We've done that. I want to share a couple of statistics with you. Mobile traffic this year, seasonally adjusted, has probably been growing about 10% per month for us. We're seeing pretty rapid growth. It's risen to about 10% of our total site traffic. To give you an idea of the impact of both smartphone penetration and our new platform, our conversion of mobile shoppers in August to a buyer was over triple what it was prior in August 2010. There are two big things driving that. More smartphones, which are easier to use to browse and shop the web, but also our new mobile shopping platform made it much easier for people to shop and convert. We're very excited about our progress.
We think we have probably one of the better mobile shopping platforms out there. I'll talk more about that, but we're going to continue to invest to stay ahead of the pack there. Fulfillment. I forgot to show the screenshots, but there are some of the screenshots of our site. Go to it. It's very easy, very shoppable, and we're very happy with the progress there. Last on 2011, I want to talk about fulfillment. We opened our Phoenix distribution center in the spring, and this was very important for us on our path to $2 billion. We needed more capacity. We also wanted to get closer to our West Coast customers to ship them faster and cheaper. We've opened up the building. We have Old Navy product in there right now. Old Navy is our number one unit driver.
It was important to get Old Navy into that building for this holiday peak to give us enough peak capacity. The building's gone very, very well. It's really our warehouse of the future design. We're very excited about it. Next year, we'll be putting Gap in there, our second largest volume unit driver in the U.S., and we'll continue to scale the building from there. That has gone very, very well. For those of you who know, when you open new warehouses, it's sometimes a big challenge. This has been without a bump. We're very pleased about that. Now, very busy year. This is just a highlight of some of the stuff we've been working on this year. I want to talk a little bit about 2012 and some of the things we're going to be working on next year.
First, and I think Stephen mentioned this briefly, we plan on launching Gap and Banana Republic online in Japan sometime in Q3 next year. We will own and operate that. That won't be a third-party site as we do have in China, which Stephen mentioned. We were going to do it this year. We deferred it partly due to the tsunami earthquake disaster that hit the country, but we are going to come back and launch that in Q3 of next year. Interestingly, we're going to launch it 100% on our ship-from-store technology. This is an example where we're using our technology to do different things around the world. The reason we're going to do that is it's going to be very powerful. We'll be able to see how high is high because we'll be able to tap into all of Stephen's store inventory in Japan.
We will take all of the orders and send them down to stores for fulfillment. Once we can read the business, the composition, the size, and the growth, we will then make the proper decisions on what sort of backend fulfillment investments we need to make over time. Rather than the traditional way, where you guess, you go in, you put a big investment in, and then you see what happens, this way, it's much, much more efficient and much more leveraged. We are going to explore Old Navy Japan for later on. We're not going to launch Old Navy Japan online, co-terminus with the stores that Stephen mentioned, but we will come back and look at that possibly for 2013 or beyond. Athleta stores, come back to talk about that again. 10 by the end of this year. We've publicly said 50 by the end of 2013.
You just do a straight line between the two. It doesn't take a math genius to know that 30 is about the right number that we're going to have by the end of next year. Could be plus or minus, but that's the pace we feel comfortable with right now. We're having good luck securing real estate locations of good quality, and that appears to be about the right pace for us to scale up the business. Obviously, long term, there could be more potential than 50. In the two-year time horizon, that 30 and then 50 is what we feel comfortable guiding you to right now. The other thing I want to talk about is the business model for Athleta. I had a couple of questions last night at the reception. How many stores do you have to have before Direct will not be managing stores anymore?
It is kind of weird. We're Gap Direct, and we're opening stores, right? We have a very powerful operating model we've crafted for Athleta. One, we're going to manage the inventory from one common pool, physically and digitally. One common planning and replenishment platform, one warehouse altogether. That is going to allow us to dynamically and continuously balance inventory between the channels as we see fit to maximize economics. Two, we're going to be applying our direct fulfillment skills to have very rapid, continuous, high-quality replenishment to keep the service model really great and in stock really great in the stores. Three, we're going to be utilizing our ship-from-store technology. If we happen to overallocate to a store, rather than it being stranded and perhaps having to go to a kill price, we'll be able to clear that item at a fuller margin with a web order.
All three of these things combine to let us maximize the sales potential of this brand and the margin efficiency. We think this capability is a real competitive advantage. We're not aware of anybody that runs a multi-channel business like this out in the marketplace. It is a greenfield opportunity for us to build that capability up, and it is really going to help us. The economic model for Athleta stores is also quite attractive. It is a premium brand, differentiated. We've got high AURs. We've got strong gross margins. We're demonstrating strong sales per square foot. The store economics are attractive. This multi-channel operating inventory model I talked about will further boost the store economics. There is one other important thing about the economics of this multi-channel expansion for Athleta that is important to talk about. Catalog prospecting for new customers is expensive.
Many customers want a store before they're going to be a new customer. Over time, stores are going to allow us to remix out of some relatively expensive catalog prospecting, and they're going to become the prospecting vehicle for us. That is also going to be an economic boost to the system. Bottom line is we're very bullish on the Athleta growth potential, and we're very bullish on the economic model and the impact of that growth at the margin over time. Piperlime, I'm going to just tease you a little bit here. The big thing we're going to be looking at in 2012 is we're going to explore multi-channel for Piperlime. We believe multi-channel still remains the most compelling way for people to shop in our industry. We think multi-channel has great advantages. We're going to explore it.
We think Piperlime's assortment and brand has gotten to the point where it's worth a hard look. Nothing definitive to say to you today, but that's the big thing we're going to be taking a hard look at to scale and grow the Piperlime brand. That's a little bit on international, Athleta, and Piperlime. Briefly on mobile, mobile is all about continuous enhancements. We're going to constantly be improving mobile. You're going to see us rolling out faster site performance and navigation improvements. We're going to continue to port features from the website to the mobile device, like order status and tracking. We're going to do a better job integrating our dynamic marketing content at the site and through email through the mobile device because it's not perfectly synced right now. All of these things are going to be continuous improvement.
We're going to work to stay ahead to have the best mobile platform out there. The other good news is we're going to launch our mobile platform, shopping platform online for Canada and Europe next year. We're going to bring those skills to our businesses there. Last, I want to talk about multi-channel. You heard Glenn talk about multi-channel a little bit. This is the big focus. 2010 was the year of going international. 2012 and beyond is going to be about multi-channel. It's going to be about us now turning some of our guns and focus and attention toward driving the multi-channel business system for the company. Let me talk a little bit about the vision here. If you look at our online and store traffic combined, add them together, online is about 40% of the traffic.
We're an amazingly big portal to the overall brand and to all of our channels. Multi-channel is all about providing better service to those customers and better leveraging them for the benefit of both stores and online. Another fact, though, online has about 40% of brand traffic, and this is in the U.S. only. We carry about 10% of brand inventory, the total brand inventory in our warehouses. As a result, we book about 10% of the sales. What kind of potential can we unleash if we can let people through the website, through their mobile devices, have access at their fingertips real time to 100% of the inventory of the brand? What kind of potential can we unleash? The first thing I want to talk about is this thing we call internally Easy Buy Anywhere.
That's where we want to let the customer, through any device at their fingertips, have access to all the inventory in our company at any time. Clearly, ship-from-store technology is part of this. If you're at the website, we don't have it in the online warehouse. We want to be able to go find it in a store and ship it to you. If you're in a store, we don't have your size. We want to, at your fingertips, be able to find that size in another store or online. That's the kind of vision we have. It will encompass over time, order or reserve online and go to the store to try it on and buy it and other sorts of modalities. It also, someday, we're starting to conceive of using it to have same-day delivery.
We could start thinking about using our stores as a forward-deployed warehouse where we can use our ship-from-store technology for same-day delivery to really put the easy in Easy Buy Anywhere. The potential is really exciting. This isn't going to happen overnight. These are some of the things we're working on and we're going to drive. What's great about it is using our stores as a competitive weapon is something we're very focused on. The next thing I want to talk about is open data everywhere. It's a closely related concept, but essentially, we will take all of our store inventory data and we're going to publish it out to the website. Essentially, we want to let customers customize the website to their local store. Essentially, we want to be able to publish out thousands of individual localized websites corresponding to each store.
We want somebody to be able to go to gap.com and set my store and have all the content at the site tailored to the inventory that's in her local store and then make it very easy for her to see what else can be shipped to her from other locations through Easy Buy Anywhere. Maybe her favorite Gap store, there's 10 spring dresses that she can see that are in stock right now for her to pick up in her size. Maybe there are 20 other dresses we can ship from a Gap flag store or from the online inventory and make it very easy for her to see all that at her fingertips in one swipe. That's what we're setting out to do. We're not setting out to do just a little item lookup, which some retailers do today. That's okay. That's not the home run.
We're looking for the home run here in how to craft this experience. Again, this isn't going to happen overnight, but it's what we are working on actively right now. Mobile, then I keep talking about mobile. Mobile is all about everything I'm talking about is going to happen through the mobile device. All this stuff at your fingertips. Easy Buy Anywhere, open data everywhere. This is going to be available on a smartphone. It's not going to be just through a tablet or through a PC. Trackable online media. Next, this is a very interesting thing. It really is in the camp of us trying to develop techniques to power advantage for all of our channels. The idea here is having a way to measure online advertising's impact on stores quantitatively, scientifically. It's been a big challenge for multi-channel advertisers to do that.
We have developed some ways where we can actually scientifically measure the impact of online ad spending to our stores. Why is this important? Because it can allow us to channel our dollars in places where we know we can get an ROI. We've already deployed incremental investments for Gap, Banana Republic, and Old Navy and been able to measure the lift, not just online, but in store. It's a very exciting development and a very exciting breakthrough. These are some of the multi-channel highlights. I think you get the idea. We've got a very rich multi-channel agenda. We in GID are very good at what we do. What I'm saying to you today is we're going to be now turning our attention to driving multi-channel probably at the top of our list. That's going to create some big opportunity over time. We're going to be very good at it.
Summary, going back up, with all the stuff we have in flight and in the pipeline, we are excited about our growth potential. We solidly are on track for our $2 billion, half a billion goal, by no later than 2014. We're going to drive growth in the U.S. from Gap.com, Bananarepublic.com, and OldNavy.com, from Piperlime, from Athleta, powered by stores and going multi-channel. We're going to drive growth in our international lines of business, Canada, Europe, and as Stephen and I have said, soon Japan. We continue to have our third-party relationship in China. All that is going to allow us to reach that goal. As Glenn talked about, it's not one thing. It's not two things. I've got a basket of initiatives, a whole bunch of lines of business that are going to help me do that. One might come in hot, one might come in low.
I've got a basket of initiatives that's going to help me get to that goal. In addition, the multi-channel stuff I'm talking about is not even in that goal. It represents upside. It represents upside to that $2 billion goal. If ship-from-store technology becomes a big deal for us, that would be upside to those economics for the company. To wrap up, we've got a powerful global e-commerce platform. We've got best-in-class e-commerce skills. We've got the ability to innovate and drive growth. Most importantly, we've got five great brands to take our online skills and exploit to drive growth and profits for the company. We're excited about that, and we look forward to delivering on it. That's it. I guess we'll turn it over to questions then, Katrina.
Yeah. We have time for a few questions for Toby, and then we're actually going to take a break for about 15 minutes. Questions for Toby? Yeah. Marnie.
Hey, Toby. Two quick ones. Are you seeing good crossover from customers that come into your site via Piperlime or Athleta into your core brand? I'm guessing they're slightly different customers. If you could just touch on mobile, it's clearly a big forward-looking initiative for you guys. The number of times I see people in your stores taking pictures of product and texting it to their friends, which leaves Gap Inc. out of the equation. Shouldn't that sort of be your first step into mobile, is somehow capturing that conversation or being involved in that conversation that's already, she's already using that and understands that technology?
Yeah. I'll take the second part first. If she's in our store, snapping pictures and sending to her friends, we love that. That's great. I don't have time to give you all the great things that are going to happen in mobile. By the way, I'd be lying to you if I said I have perfect vision as to all the great things that are going to happen in mobile. That's one of the things that happens today. There are going to be lots of things that are going to happen in mobile that are going to be very powerful. We can't necessarily control the dialogue. The wonderful thing about the technology is the customers are going to talk about the products amongst themselves. Us inserting ourselves into the middle of that is hard. We do a lot of stuff at Facebook.
We do a lot of stuff on our sites. We do a lot of stuff in email. Ultimately, we are a company that sells fashion. If we do a great job at designing great products, she's going to talk great things about us through the word of web. It used to be word of mouth. Now it's word of web. If we stick to our knitting and do a great job at that, the technology is going to help amplify our brands. We're not stressed about getting in the middle of that dialogue. What we need to be stressed about is having great products. We think the technology is going to just take it from there. On the first part of your question, cross-shopping, we do. We do measure cross-shopping.
In fact, there are people who might be lapsed from Gap purchases who come into Piperlime and then get reactivated at Gap, as well as Gap going to Piperlime. There's a two-way balance of trade, so to speak. There's a two-way benefit. Each of the brands being there together across marketing and the universality framework helps us drive engagement, drives incremental revenue, and drives customer value. We do measure all that, and it happens every which way, every which way. It's attractive.
Great. Next question? Yes, in the back. Wait for the mic system. Sorry.
Question was on the ship-from-store technology thought process. Just maybe, you know, whose P&L would the inventory be on? How would the store employees feel, you know, if they're shipping things and spending their hours, maybe not getting comp or store performance? On the free shipping, you know, how does that impact the profitability for you to get to that $500 million EBIT margin goal?
Yeah. I'll take the second part first. Inside our guidance is embedded the notion of free shipping to get to the $500 million. It's in there. Our operating margin was just 22.5%, and then it went to 23.2% in 2010. We're going to continue leveraging up to 25%. In that, there's a lot of activity. There's a lot of new businesses ramping up that are not mature. There are mature businesses that are growing a little less slowly. There are investments in things like capacity and free shipping. It's all in there. We get advantages from scale as we grow up. We leverage some of our SG&A. We're going to get advantages in our backend operations. By going to the West Coast, we're going to get cheaper shipping to the West Coast. That will be a reinvestment. We'll use the fun part of the free shipping.
There are lots of things we can do. You can see we're very, very profitable. We easily have the financial power to make that incremental investment. What's really going to be the attractive part of it is it's going to help power incremental growth. Incremental growth at the margin more than pays for the free shipping investment. It is an investment. It is impacting our margins slightly. Over time, we're going to keep leveraging up to that 25% operating margin goal. The first part of your question was store associates and incentives. Every store associate has absolutely got to get credit for every single sale they participate in for a piece of inventory in their store. They do and they will. That's got to happen. You've got to let them, they've got to be incented to do the right thing in the local store environment. We do that today for the stuff we send to Banana Republic stores right now.
We have time for one more question. Yeah.
Thanks. Just following up on that, could you talk a little bit about the timeline for the ship-from-store technology? What's the test period, and when you actually get to where you want to be?
Yeah. We have been testing all year with a small amount of Banana Republic stores. That has gone very well, and we are going to roll the next phase of it, as I said, in the next literally few weeks, two to three weeks, just under 150 Banana Republic stores, just under 110 Gap stores, and the 10 Athleta stores. I think next year when I talk to you, possibly Glenn and Sabrina sooner, we will have lots more to say. I think that next phase-up is going to be really important because we needed more stores in the system to really be able to see and measure the full impact. We are pretty sure there is some very nice incremental demand capture potential from the technology. That next phase-up, which is happening as we speak in Q4, is going to be really important for us to give you more specifics about it. We are very, very excited about it.
Great. Thank you, Toby. All right. We are going to take a quick 15-minute break. Please feel free to see the showrooms on the break, and we'll have you back for the next part.
Ladies and gentlemen, if you go ahead and get seated again, we'll begin our program. Ladies and gentlemen, if you would take your seats, we'll be ready to begin our next piece of our program. Please take your seats. Ladies and gentlemen, please take your seats. Our program is about to begin. Okay, everyone, ladies and gentlemen, we're going to get started here. I'd like to introduce Art Peck, President Gap North America.
Good morning. I'm going to talk about a couple of things this morning, and I will ask Mark Breitbart, who is my Head of Merchandising, to join me in a few minutes. We'll save some time for questions as well. Really, a few full things. I want to talk about short-term work that we're doing to impact business performance now and on a short term going forward. Then a brief moment on some of the things we're doing in parallel to continue to improve the stability, the consistency, and the overall performance of Gap North America. Let me spend a moment just on who I am since I know some of you, but not all of you. I joined Gap about six years ago. I came in from the Boston Consulting Group where I had a long career.
Left there, and I was managing the global practice P&L for the business. I spent my time in client service significantly in entertainment, filmed entertainment, and music, as well as retail. Came into the company in a pretty traditional strategy and business development role and have worked closely with Glenn and the team on the strategy that we're articulating today. Assumed fairly shortly after joining the company responsibility for really building the franchise business from an idea to opening over 100 stores across a number of different countries. I took on our North American logistics operations in addition to that. In 2008, I moved into the outlet business.
With the team there, we quickly moved the business from what I would describe as having been somewhat in genteel decline to an improvement in top line performance through top line, through comp store sales and new real estate and global expansion, as well as a significant uptick in bottom line performance as well. I joined in this seat, joined Gap North America earlier this year in February. It's been a busy six years. It's been a busier eight months. I'd like to talk about some of what we've been doing and how we see the business and where we're going. First, I want to spend a little bit of time talking about the assets of the business because I come to this seat with incredible assets in this brand.
I think it's important to call those out as well as focus and acknowledge, obviously, the struggles that we've had in top line sales and in business performance. I think notably, the soft spot, and Mark will talk more about this, has been significantly in the women's business. Men's has continued to perform and frankly has gotten stronger season by season. The kids and baby business has been a solid and consistent performer along the way. The body business has some very bright spots in the business, but women's has been tough. Significantly, as goes women's, obviously, so goes the business on an overall basis. You will hear us talk a little bit today about what we're doing to improve the business in the short term. We will talk about where we think product is getting better.
We will also talk importantly about some of the underlying changes we're making in how we work and what we do to deliver better product and deliver better product with consistency, which has obviously been a challenge for this business. Other assets, we have great real estate. Real estate's a liability, but it's also a huge asset. It's a financial liability, but it's a huge asset. You look at the doors that we have, and our competitors, in many cases, would kill to get the real estate that we have. Our job is to do better with it. We have an amazing brand. There are those that ask whether Gap is relevant. We have hundreds of millions of footsteps every year crossing the lease line. We have near ubiquitous brand recognition. Both of those are huge assets as a starting point.
Frankly, we have, and the quantitative research shows this, as does you just talk to customers, there's a huge amount of goodwill out there towards this brand and an expectation that we haven't been adequately fulfilling. On that basis, this is a team that is really energized about the opportunity. Importantly, I would point out also a sense of urgency that this team has. We get current performance. We are not pleased with it. We are committed to improving it. We're committed to improving over the long run with consistency of performance at a higher level. Some of the things that we're doing, let me just talk very quickly about that. I would focus first on the team. Obviously, whenever you get into a new seat, the first thing you focus on is talent.
The team that you have leading the North American business today is significantly a completely new team, either in significantly new roles like Mark, where he was successfully running the kids and baby business in merchandising to all of merchandising in the brand, to new players in the other seats to a person, many of whom have had significant experience and successful experience outside of Gap. It is a new team with a new perspective, not encumbered by many of the things that we've traditionally done in the business. I want to underline that because it is a team also that does not believe that it's going to come in and do the same things that we've done before and achieve different outcomes. If I were you, I would be asking, what are we going to do differently to improve performance and consistency in this business? I hope to address that question somewhat through the conversation over the next few minutes.
Product development, which is critical, and I'll only spend a moment on it. Mark will talk about it much deeper. From my past experience, I've worked in creative businesses. My experience in creative businesses is that discipline and process empower creativity and empower great results, that they're not competitive with each other. One of the things you will see in this building when Mark talks, when you talk to Pam this afternoon, is we have been building a product development process, a three-season, in-parallel process that is cross-functionally integrated, that we believe has the potential, and in fact, we have high expectations of it, to consistently deliver against the expectations of our customers, product that is brand and aesthetically right. It is a disciplined process that's frankly been running in Kids and Baby, less so in the Adult business.
We're now on that process, and we are very excited about what we think it could do for us. Mark will spend a minute more talking about that. Marketing. We're coming at marketing from a very different place than we have historically as a brand. You'll have an opportunity to talk with Seth Farman, who's the Global CMO this afternoon. I would emphasize the fall campaign, which was very much about talking about what Gap as a brand is, and then also a strong product message in terms of the product aspiration of our denim business. It's really moving from, I would say, telling one synthetic story to telling real stories about the brand and multiple stories that customers can choose to engage in.
On the great majority of metrics that we assigned against that campaign, we saw very good results associated with it, most particularly in attracting a new customer, the interest and relevance of a new customer and a younger customer than we need in this business. The last thing I would talk about, in terms of doing things differently that's important, and there's a broad range of them, and I'll dive into a few more after this, but the important thing I want to underline is the field as well. We have a huge asset in our stores and in our field people. It's where the bulk of our headcount are. I'll be the first to say that our stores have not been executing with the consistency that they need to execute at in order to deliver the kind of brand experience that we are committed to delivering.
We have absolutely great stores out there that knock the ball out of the park and outperform every day. We don't have enough of them, and we don't have enough of them consistently to deliver the performance results in this business that we're committed to delivering. Steve Stickel, who is not here today, who is my Head of Field, worked in the outlet business and worked at Banana Republic, had a long career at Macy's before he came here. Steve is a tough guy, and we have raised the bar in the field very significantly. First and foremost, a number of changes in people because it starts with people. We've made changes at the senior level of the field organization, and we are making changes at other levels of the organization as well. We will not accept inconsistent performance on an ongoing basis.
We need consistency, and we need the bar to be set higher. What I'm talking about here is many things, and I'll dive a little bit deeper into it. Simple things like our replenishment practices, store standards, the customer experience, fitting room, and cash wrap, these are retail fundamentals that, as a company, we can be world-class at. We have not been consistently world-class at. In many cases, we invented the model. We need to get back to those world-class practices as quickly as possible. We're starting to see results there. We're seeing it move in our customer experience surveys that measure the actual experience of a customer in a store. We need to continue to move that needle as quickly as possible. How that shows up? It shows up in terms of one of the most important metrics of conversion.
We still have the bulk of our footsteps that walk out of our doors without a bag in their hand, and it's a big short-term opportunity to drive the business with customers who are already part of the brand. A couple of things I want to talk about then deeper on product for a moment because it's important, I think, and Mark will go into this again as well, just to call out a few of our product successes in the women's business, which to me are not proof of change but validation, hopefully, of the direction that we're going. In February, we immediately went heads down on the product that was in the pipeline. That product is the product that is now starting to show up in the stores today. It's the product that you saw in the showroom this morning.
It was the product that we were able to affect, program by program that far out in the pipeline. We canceled some programs. We added some programs. We changed some programs. The good news is that the things that we changed, the things that we put into work that are now in the stores are absolutely registering with our customers. The significant sweater program that you saw laid out in the showroom, that was a change that we made. We put people on planes to Asia. We put those sweaters in work. We felt that they were absolutely on trend and appropriate for the brand. We put quality into those sweaters. They're in the stores now. Very successful product acceptance with our customers. The cord leggings that you see in women's as well, same story.
On trend, great color palette, perfect fabric, a right price sale, and that's what we need in this brand. A number of other programs as well that are working right now. Again, good consistency in Kids and Baby, good consistency in the Men's business, and some very bright spots in the Body business as well. My philosophy on product, and this may sound a little bit, a little bit different than maybe what you have heard in other places in this industry. To me, product is necessary but not sufficient to sustain great results. We have to put great product in our stores, brand right, trend right, quality right, priced right every day. On top of that, I want to talk about a few of the things that we're doing to lift the bar even higher. None of them individually a big deal.
Cumulatively, we believe that they will have a significant impact. In a way, blending the art of merchandising and design with some of the science and process in the business that we feel is critical. What's our big problem in the business right now? Bad product. We're overly discounted. We're overly marked down. How do you get at that besides putting better product into the stores? Number one, our unit buys. We put a lot of pressure on the business in the first half of the year with units in women's tops in this business. Where did we have the toughest product acceptance? In Women, in women's tops in this business. We had to discount heavily to move that product through. We have rebalanced the unit pressure in our business significantly already in the back half.
We're looking very carefully at where we're putting pressure on the business as we go into 2012 to get the right balance of units in the right places of the assortment, and they will be able to pull pricing pressure back off the business. That's number one. Number two, how we allocate product. In much of our product from a fashion standpoint, we've had a methodology of fully allocating the entire flow on the initial allocation. What that does is it ends up with product in stores where the product is selling better and product in stores where the product is selling worse. You get orphaned and stranded product that you have to mark down or promote to move through the system.
We've rebalanced our allocation methodology to hold more product back, read the results across the fleet, and then reallocate into those stores where the product is performing better and pull back on the allocations in those stores where the product is performing less well. That, again, will release some pricing pressure on the business. In outlet, a couple of years ago, because the outlet business is inherently a promotional business, ticket promote, ticket promotes the way that business runs, we developed an in-house tool, which is proprietary for localizing our promotions across the fleet. It allows us to take local promotions on a pricing basis into individual stores and, importantly, has a logic engine at the back end of it to be able to allocate product on the basis of store-level elasticity.
For those stores that can sell a Gap arch because it's a tourist store and tourist logo products, never at a discount ever, they will never get a Gap arch promotion, and they'll get a disproportionate allocation of the product. We have basically ported that capability directly into this business. We're testing it right now in a couple of divisions of the business, and we want to have it up and running fully by the end of this year to impact 2012 performance. We believe we will remain promotional. This is an industry that's promotional, but we can't continue at the depth of our promotional cadence and depth in the business. That's another tool for helping us do that. I won't promise any specific level of performance associated with that, but I can tell you in the outlet business, it was real, and it was material.
It significantly impacted the rate of the business and the overall profitability. Toby mentioned ship-from-store. Really excited about that. In my words, ship-from-store, as we implement that, virtualizes our inventory. We get the benefit of a higher margin in the online business and that margin spread and rate versus stranded inventory in our bricks and mortar business. Our ability to play arbitrage between in that rate spread across the business, we think could be potentially a significant impact on our overall discount levels as well. We are promo-ing differently today than we have historically. A good example of that is Columbus Day. We had a four-day Columbus Day promotion this year that was an up-to-50% off because Columbus Day weekend is a promotional weekend for the mall. If you don't play, you go home. Last year, we had 40% off the entire basket on Columbus Day.
We drove a huge comp, and it was really tough on margin. This year, we had a 50% off for four days, which allows us underneath to manage rate across what's in what bucket from a promotional standpoint. We drove very good comp with that, and we managed to very good margin. Not rocket science, but a principle that we're putting in place here, which is how do we back off of this depth of promotion as we put better product in the stores, we restructure our promotions, and we bring these tools to bear against the business in order to increase our margins and increase our rate in the business. A couple of other things I want to touch on. Obviously, stuffing 8 months into 10 minutes is tough. We'll have some time for questions after this. Real estate. It's on everybody's mind.
A number of you asked me about this this morning. Sabrina mentioned the 700-store target that we've put out there publicly for the Gap North America fleet. We're committed to that. It's part of our market planning. We have a path to get there. It's part of naturally managing our exit from centers where they're no longer appropriate from the brand, and we will work our way through that. At the same time, as she mentioned, backfilling in a select number of markets with a Gap. We've had a strategy now that we've been testing for over a year as I've been in the outlet business to put Gap factory stores out of traditional outlet centers. So far, the early returns on that are very good. In essence, it's about acknowledging the fact that not all value customers shop in outlet centers.
There are plenty of value customers who don't, who have a desire to participate in the brand. It's a way to take that value expression of the brand to a customer who wants to be in the brand but is either unwilling or unable to participate in it at a premium specialty price. Last thing I want to talk about then is, on top of improving short-term performance, we have an obligation and an opportunity to really drive sustained health back into this business. As I mentioned, we have great assets. We have, however, become stale and predictable. We did an exercise a while back with some customers and literally said, "Close your eyes and talk to us about a Gap store." We would hear, "I see maple flooring. I see a bank of denim.
I see all the things that have almost become cliché about what a Gap store looks like as much as it's made it part of the cultural landscape of real retail." It's our obligation, frankly, to refresh the experience. That sense of discovery, that sense of newness, which is what retail is all about, and if you don't do it, you fall behind, is something that we're working on, really pretty aggressively right now. To do that, we've taken some stores, in essence, out of the fleet, in L.A. right now, and then a couple of stores around the San Francisco Bay Area. We've been testing some things. Let me underline the fact that there are components of it that are a new store design, absolutely. A new store design without a new customer experience is not the way that you win over the long run. It's a service model.
It's a hand-picked assortment that is beginning to bring in complementary third-party brands. It is a new store design. It's a new way of displaying product. That, to me, is one of the most critical things, which is we are not getting paid today for the quality of product that we have in our stores. In this business, good product in a turnaround, business performance always lags good product. Our product is better than our performance. In these stores in L.A., where we have started focusing on a different form of product presentation, less mass display of product, more selective display, a different replenishment model, very positive results. Very early days, not going to declare victory by a long shot, but very positive results so far.
The Grove, which is obviously a very, very great center in Los Angeles, will reopen with the full brand expression of this next version of this, at the end of this month. For those of you that are out in L.A., I would suggest that you stop by. It is not the endpoint. It's really the starting point of us beginning to refresh what Gap stands for as a brand while building on those incredible assets that I mentioned at the beginning. With that, product should be on your mind. Let me invite Mark up on the stage to talk about what we're doing on the product side of the equation.
Thank you, Art. I am Mark Breitbart. I oversee merchandising, as you now know, for Gap North America's business. I've been with the company for 10 years with a short break to work for a couple of other brands such as Levi's in the middle. Before taking on this role, I was overseeing the Gap Kids and Baby Gap division. Today I'm going to share with you some of the insights about product, our approach, some of our philosophies around merchandising, and share some of our aesthetic work that we've done, as well as some specific examples by division. As Art mentioned at the highest level, I do want to remind you there are three business units that we are running. There's the Gap adult business, which has men's and women's, there's the Kids and Baby business, and there is the Gap Body business.
At the highest level, the Kids and Baby business, we're pleased with the performance and has been very consistent. The Body business has some great foundational businesses that we're really pleased with that we need to do more with. Bras, underwear, and the Gap fit business, the sport part of that business, we're happy with the progress. There's much more we're going to want to do there. We're both very passionate about that business. The men's business continues to perform. It's exceeded expectations. It's been consistent. We've been pretty conservative with this business, and we're going to try to build more energy and some growth into men's as well. The women's business, we have very publicly and vocally and globally talked about how the challenges we've had in the women's business, in no small part, due to the off-brand product we've had over the last year.
We've brought this on ourselves with challenging product that has lacked color. It's lacked a style point of view, and it's been very poorly received, as you guys all know. I want to talk a little bit about what we're doing to turn around product, particularly in the women's business, but it will also be sort of an overarching some philosophies around it. I first wanted to say that, you know, Art talked about the importance of process and discipline. I want to talk about how in bringing product to market, in merchandising, there are sort of the glamorous aspects of it, that people always like to talk about, color and trend and the aesthetic and fashion. There are the less sexy parts of merchandising, which are absolutely critical to deliver business consistency. That is the process and the discipline behind it.
I want to start by talking about some of the less sexy parts, but that are really critical that we've been working on together, that we've been working with Pam very closely on, which from my perspective, begins with alignment. Art mentioned alignment across the functions, bringing big ideas to market. We have not been doing this over the past year well, and we have new process in place and tools to bring better alignment across all functions. What this means on a very tactical level, what a big message will be in the window, will be bought appropriately, will be trained appropriately in store, from inventory management to visual across all functions.
And marketing.
Marketing, and actually now, globally as well for some of the biggest messages. We also are aligning on secondary messages. Each division with the full cross-functional teams are aligned on what these secondary messages of the season will be. These are very fundamental concepts in retail, I know, but we have not been doing them consistently. A few other ways we're talking about process and discipline: discipline in the key categories. I think we've proven that we can launch categories well. We have not proven we can sustain them, particularly in our equity businesses, our core businesses, denim, khakis, knits, and we're building better plans for launching and sustaining those businesses. Promotional discipline, discipline around our promotions, around pricing, as Art mentioned. Feedback.
We have launched in the last two and a half months, and it's essentially an internal social network where we can have immediate feedback from store managers and their top associates, where they post comments from customers and comments that they have themselves and that they're hearing, directly to and have merchants respond instantaneously. We are constantly doing it. Merchants are asking questions. This just delivered. What are they wearing it with? It seems like this color is doing well, or there's a problem here. We're getting instant feedback in a way we haven't before, and it's been really interesting.
Can I just add, Mark, we're also going to be trialing a crowdsourcing platform for our field employees to be able to look at our products, comment on them before we make our inventory investments on a going forward basis. To be determined what that'll yield, field's really excited about it. We're interested to see what that yields as well.
True, and that will be happening over the next few months. We'll be piloting that. Also, we've talked a lot about the speed pipeline. That is another process we brought in place to help us bring higher margin products, more trend right, into the business. As we talked about, some of the styles that you're seeing now entering into the line were developed on that pipeline. Where you see more color, where you see pattern, where you see print, were developed on that pipeline. Process and discipline in the business, not particularly glamorous, but very critical to our success. Now, on the more glamorous side, our aesthetic. As with our overarching performance, we have been inconsistent in how we've delivered against our aesthetic. Again, kids and baby is delivering covetable American style, easy to outfit. We've been delivering it consistently, and our results have reflected it.
In the body business, great casual American style, but that is either in the sexy bra and underwear part of the business, or as in Gap sport, we add style plus performance. Again, we're in a good spot there. In adult, we have, it's a work in progress. We clearly have had work to do. Where we have delivered casual American style that is optimistic, that is more youthful, we are seeing the results. I want to talk, I guess I should first say that I don't think words have been our problem, and that when you look over the last few years, we've danced around different words to describe our aesthetic, and that tends to have not been the problem. It's been about execution. Having said that, I still do want to share with you the words that we are using to talk about our product.
After lunch, when you can go down to the 11th floor, you'll see, Pam and Seth can talk even in more detail about it. We need to be youthful with a contemporary flair, not missy. We need easy-to-wear, versatile styles that are not fussy. We need color. Color is a huge, huge part of what it needs, of our aesthetic for Gap brand. Color brings optimism. Color brings energy. Color brings confidence into the store. We have largely, for the last three years, been lacking color in this business. I want to just give you a quick snapshot of before and after for spring that I'm going to show a slide of spring 2011. This is a color photo. This is not a black and white photo. The entire store was sort of a sea of neutrals in 2011, as you will recall.
Just a quick snapshot, fast forwarding to 2012. You'll see more of this downstairs. Particularly when we're in a color trend, obviously, it's critical for everyone, but color is such an inherent part of the brand that I think it's important to flash that in front of you. We also know that denim is going to be an important part of our aesthetic. Wardrobe and back to denim is sort of at the heart of the brand. If we start to nail the aesthetic, and then you say, how do we position that aesthetic? We unlocked something very powerful with the 1969 launch. We unlocked this accessible premium platform where you take style and quality cues from the premium market, and you bring them into an accessible price point, and you make an accessible and easy shopping experience. We need to continue to build on that.
For instance, in denim, we want to build on that. We now have the 1969 L.A. office up and running, bringing newness. Art mentioned the success we've been having in colored leggings, in the cord leggings, the prints that you saw in our showroom this morning. We are very excited about this trend and have plans to keep it in place and keep it fresh for the next few seasons, giving us, while still having flexibility to manage trend. Also in black pants, we've been very pleased with the platform we built. We need to do more to sustain this. We had success with the menswear pattern, but we need more pattern, more color, and we're bringing that in. GapFit active bottoms, again, launched last October.
In this part, it hasn't been as loud, marketing-wise, but we have done actually a decent job of bringing newness through color and silhouette into this business, and it represents a good example. If we start to feel better about the aesthetic and better about delivering the aesthetic consistently with better process and discipline for the business, and we are platforming it as this accessible premium, we have to tell the customer. Something that Art is very passionate about, that I'm passionate about, that you will hear Seth be incredibly passionate about as well, is storytelling. Doing a better job of storytelling with the brand. In order to tell better stories and better product stories specifically, we clearly need big seasonal messages and bigger ideas. Over the past year, you could argue that the only story we've been telling is a promotional story in Gap brand in North America.
That will start to change. It's actually started to change even in the past few weeks, where you'll notice a sweater window. Art mentioned the sweaters. We had cable, and we started telling a story about cable and merino, about new yarns, new quality. We did training in stores where we actually showed them in Style, Lucky, Vogue, and said, "This is a major trend." We had the inventory, we had it in the front of store, and we layered on a sweater promotion on top of it. We are, as Art mentioned, really pleased with the results we've seen.
I think in an environment that we all acknowledge is a very competitive retail environment that will be promotional for the foreseeable future, it would be foolish to say we're going to shift into entire storytelling, but making it so that the promo isn't the entire story and that we are doing a better job of telling big product stories with promos that layer on is going to be our key strategy. In the kids and baby business, we've been doing this actually pretty well. The stories have been around collection. This is an image from Holiday where we talk about the "I want candy." This was set up in our showroom. It's a great holiday emotional product story that is centered around kids in a candy shop. We're even bringing candy into the store to help tell that story. We will have promotions that layer on.
That's an example of the storytelling I'm talking about. Those are sort of the overarching philosophies for how I think we're going forward with product for this brand. We're going to have some time for questions, but before we do, I want to highlight a couple more things in the women's business because we've been so vocal about the challenges we've faced there. First, as I think Art spoke to, where we have delivered against casual American style with a more youthful expression with optimism, we have seen the response. The sweater example, some key fashion items in knits where you see more color. We have seen off the speed pipeline. They deliver against the aesthetic. We serve it up, and we're seeing success there. We mentioned traction in some of the bottomed areas already. Colored legging, cord legging, more, and we'll continue to push in those areas.
The results we're seeing in areas where we feel like we're delivering this are energizing for us, and they are encouraging us to continue down the path that we're on. I just want to reiterate, before we take questions, that we are completely dissatisfied with the current results that we have seen in the business, and that we are entirely focused on improving the product, and we will not accept mediocrity for this brand and product. With that, we are going to have a few minutes, I think, for questions.
Yeah. Thank you guys very much. We're going to take some questions for both Art and Mark. I see lots of hands in the audience. Maybe what I'll try and do too is go to this side because my apologies, I can't see who's behind here. Dana, do you have a question for us?
Hi. As you think about the product and you think about your customer, how are you thinking about pricing? What should the right price be? What types of promotions? Like we've been seeing 40%, 50%, or 60% off. How do you move from that going forward so that you balance what should be a full price with an off price?
I think Art mentioned getting more sophisticated in pricing, both from how we allocate inventory to more local promotion options that give us the flexibility. We are moving from the straight 40% off, 50% off into more of the up to promos where we can manage it under, sort of behind the scenes. I think that's how we plan to do this going forward. Preseason buying bigger and knowing where we want to go a little bit deeper, and then having shallower discounting on the styles where we feel like we need to have shallower discounts.
Let's also state the obvious here, but it's worth stating, which is the best way to get yourself off of the promotional cadence and depth that we've been on is to put product that she falls in love with, and maybe she thinks she's going to come back in and buy it on sale in two weeks, and she's disappointed. There's going to be an aspect of that. If you see that we have sold through some stuff, we'll probably get hammered for our service levels, but the idea that it's got to be something that sells at right price that we run out of, that is not a bad dynamic, in part of this business.
Sorry. Maybe sorry. I can't read your tag. Kimberly, sorry.
I'm wondering how you plan to filter the information that will be fed to the merchants, in terms of feedback on the product. It strikes me that over the past several years, the international stores have consistently looked far better than the North American stores. That would seem to be a really easy feedback loop to help improve the U.S. merchandise. We just didn't see that at all. Internally, what are the barriers to sharing information from international stores to help improve the U.S. assortment? Secondarily, if you couldn't even filter the international information to the merchants to help them improve the product execution, how will these new information channels assist in that process?
You are in the Gap Global Creative Center right now. This building is the center of that information that we have not had previously. We are partnering with our global counterparts. I have weekly meetings with our global counterparts, and our teams are operating more globally. At the end of our product weeks, we're going through exactly what the big ideas are. We have merchants in my business that are junior merchants in North America that know what's trending in Tokyo now because of their counterparts. We are openly sharing more information by the way we are working here. I know Pam can speak more to that when we meet downstairs.
I would just add to that that having the information and doing something with it are two different things as well. As an example, in the stores that I mentioned that we're working and trying something different in L.A., part of the assortment difference is we have a bunch of the European product in there. Lo and behold, contrary to what may have been the conventional wisdom, you actually can sell a cashmere sweater in Glendale, California, in a Gap store.
I think in terms of tempering information we're getting, I've always believed that great merchandising is this combination of intuition and getting facts, you know, your gut and your facts. I think that's where we're going to need to temper information we get. A lot of the information we get from our online on the tool I was talking about is a merchant recognizing something, asking stores about it. By the time you've heard 20 different responses and the group building on itself, you start to build a picture.
Okay. Yeah, question there.
Theresa Downey and Neuberger Berman. I'm curious your comments about store presentation, etc., and also on the marketing side. How do you balance the need for changes there with, you know, what I believe is a corporate goal of managing expenses very tightly at this division?
To me, I guess the way to frame it is if we're going to put payroll back into the stores with a different replenishment model, put less product on the stores so that it appears more aspirational, and it is. It's a simple fact. We got to get paid for it at the end of the day. As we've been doing that both in the fleet and some things that Steve has been doing in some key stores and some of our bigger flags, as well as in these test stores, we've seen the payback. It's one of those things. The same is true on marketing, which is marketing that delivers no return is an expense. Marketing that delivers the return is an investment that helps drive the business. We're looking for returns on both of those.
I know that's a trite but true thing to say, but that's absolutely the way we're thinking about it. To me, there's no right payroll level. The right payroll level is the level at which you get paid for driving the business in that stores. In a lot of cases, we've pulled payroll back to the point where you can't focus on some of the basics, whether it's fitting room, cash wrap lines, store standards, and those kinds of things. We need to put that money back in. I'm absolutely confident we'll get the returns for it.
Yeah, in the front row there.
Thank you.
Hi. Thanks. I guess I have a three-part question. One is just fundamentally, what's so hard getting tops right? Why is that so difficult? When do you believe they will be right? Second, what is Gap division's lead time, and what should it be, and how much are you sort of speed sourcing now, and why can't it be shorter? Why aren't you using that more effectively?
I'll start with the tops question, which is I think that we are consistent with our strategy, which is we have great loyalty in our bottom fits, and we need to continue to drive excitement through the tops. I don't think that there's some massive unlock in tops other than if we are in a huge color trend and we have had no color in our tops. I mentioned about needing to be more youthful and more with a contemporary flair and less missy. I think we've been a little missy in our tops. I mentioned that we've been a bit fussy in some of our tops, and they're harder to wear and harder to outfit back to denim. I think starting with our areas of strength and building from there is how we're approaching this going forward. Sweaters are, we're really pleased with the progress there.
The knit business has been actually one of the stronger performing businesses we've had. The women's wovens business has been the toughest, and we have traction. Some of the wovens we have, they're in store right now. They're a little bit more conservative, and we're building on those going forward. By the time we get into the second quarter, we are trying to really reclaim our dominance in the entire knit top, where we go into fashion knit top classification. I don't think that there's a magic unlock there. I think part of what is going to help us unlock was your second question of three, which was the speed pipeline. We are building a higher percentage. If you look in the knit classification, it's a larger percentage. If you look at total women's, it's higher than it is in men's.
Across the board, we have named a person who is actually overseeing the full speed and fast process for us. We are aggressively building that, and the timelines there are anywhere from 12 - 16 weeks where we can impact our business. That is becoming a greater percentage of our business with every season. Yeah.
What I would say is it's a blended number. I haven't done the math, but we have pipelines. There are things that you can buy if it's truly a perennial basics program. You can buy them at a long lead time for best possible pricing, and there's no fashion risk associated with it. We have our core pipeline, which was shortened a year plus ago, which we're continuing to operate on, and then a speed pipeline as well. The issue that we're committed to is, frankly, as we've done some of the other things that Mark talked about in terms of building back some of that underlying process discipline and design and merchandising, is now starting to grow that speed pipeline on top. The answer would be a point in time, and I actually haven't done the weighted answer. What we are committed to is now holding open to buy against that speed pipeline so we can continue to grow that as a percentage of the overall business.
Great. We have time for one more question. I see lots of hands. These guys will be in their showrooms during lunch too, so you can ask them questions then as well. I'll take one more. They'll bring you a microphone, Darren.
Thank you. You talked about discipline. Are you changing your fit specs and silhouettes with your tops? Also, what percent do you feel should be woven versus knits? The tops have seemed boxy. Thank you.
Other than that, we're good.
Other than that, yeah, our feedback is only internal right now, so I can't get that directly from you. Yes, our tops have been boxy, and we have changed our specs. I think that if you think about the last three or four years, we have struggled with women's tops, but this past year was a true departure. Our specs got worse and were even more boxy. We had a global fit meeting, it was actually, I think, the week before last year, where we have nailed down new fit blocks for tops that I think will drive much more consistency in our tops. We know that they were too boxy. From a knits and wovens percent perspective, we don't break our business out like that. Clearly, knits, I've said, are going to be a filler big category for us. That is going to clearly be the more dominant.
I think wovens are also an important part of the business. There are different aspects of wovens that we're going after, slightly more conservative wovens that have done well, and building some fashion wovens. I always want to have great white woven tops for women in the store at all times.
Wovens as a percent of the assortment will vary by season. Summer is not a big wovens time. You get more into a holiday or fall time period, then it's different. I also, just last comment on this, want to emphasize common sense because that's a component of what I think Mark and his team and the design team here have really brought together. A women's woven top with an asymmetrical shoulder and a ruffle on it in a light fabric in February that you can't put a third piece on is not a common sense thing to put into the stores. We've gotten a lot of that, hopefully all of that, out of our system as we look at our collection going forward. Thanks, everybody.
Thank you.
Thank you very much. I'm really pleased to welcome up on stage right now our Old Navy team. We have President of Old Navy, Tom Wyatt, and we have Nancy Green, who is our Head of Merchandising.
All right. Good morning, I think still. Yeah. It is a pleasure to be with you. This is my third year representing the brand, representing Old Navy. Just as a backdrop, Glenn said it, but I'd like to say it as well. Yes, we're retailers. Our conduit is not just a retail box. It's Toby's business. It's online, soon to be more in mobile. We are a franchise. We are a brand. That's what we really look at every day when we look at Old Navy, the consumer, the store experience, the entire, if you will, experience of the brand. That's the approach that we take. When I joined the company in February of 2008, the brand was actually a bit schizophrenic. We were going through a bit of a dark time in a fast fashion kind of mode. We weren't really focused on our target customer as we should have been.
What I worked on initially and what we have sustained over the three and a half years I've been there is actually this, if you will, strategic imperative. This is what I can proudly say has really driven our business and the improvement of our business. If you go back 2003 - 2008, we lost $1.3 billion worth of business. We had five years of comp decreases in the brand. We've had a very nice run. 2009, 2010 were two positive comps for us, and we're very pleased with those. The target customer we had to land. We landed Jenny. We landed Mike and the kids. By doing that, we clarified where the product ought to go and how it could be more consistent. Quite frankly, because of that focus, the product has been much, much better.
The other thing that we did is we really said, "We're going to be a value player. We're going to compete against Target. We're going to compete against Walmart. We're going to compete against Children's Place." We priced our products accordingly. At the time, that was a little schizophrenic. The store experience, if you know this, you know this brand well, a 17-year-old brand, over $5 billion worth of business in North America. We hadn't put a lick of paint. It's an Alabama term. Hadn't done a lot to the stores during those first 16, 17 years. It was imperative that we change the shopping experience, change the store design, and we've done so, or we're continuing to do so. All of that, if you will, enveloped into that fun, quirky spirit, which is our brand, which is Old Navy.
Now I want to take you through some of the things that we've actually been proud of this year and some of the things, quite frankly, we've been challenged by. The biggest thing that we've been challenged by is traffic. As most of you know, in spring of 2008, we introduced the SuperModelquins as a brand new creative platform. They were immediately a success for us. They really landed on those four tenets that we really believe in, in varying degrees: fashion, family, value, and fun. They were dead on in value. They were dead on in family. They were dead on in fun, a very, very fun, quirky spirit in the personality and DNA of the brand. They were a little light in fashion, but quite frankly, the others overrode it so much that we really enjoyed a number of very positive comps in both traffic and business.
In the second half of 2010, I will tell you that the traffic waned, and we felt like it was time to give the SuperModelquins a little time off, a little hiatus. We started embarking on a new creative platform, and we introduced that in the spring of this year. Glenn has mentioned this on a couple of calls. We have talked about it, obviously, internally. Quite frankly, that creative platform has not resonated with the customer. It did not have a strong call to action from a value point of view. We changed product, and we changed, if you will, outfits a number of times in a 30-second spot. The customer wasn't really sure what we stood for. As you know, we're a tee item brand. When we go after Tie Shorts or we go after activewear in a big way, it makes a big difference.
We really confused the customer a bit. It wasn't brand damaging, quite frankly, but it just didn't have the resonance that it should have. We tweaked it in the second quarter. We played with it a little bit in the third, and we got some success out of it. I mentioned Tie Shorts. It's really time to say we need to move on from a music-grounded creative platform. I'll talk to you about that in just a minute. The second thing which I'm extremely proud of is Project One, O-N-E, Old Navy Evolution. We are now one-third finished with our fleet. We've taken, and Sabrina stole this, but I'm going to say it again. We've taken 1,500,000 sq ft out of our stores, and those stores are comping at a delta better than our fleet, as are the other Project Ones. We're very, very proud of that.
Quite frankly, the CES scores, which is customer experience survey that we take in our stores every day, are at the highest levels they've been since we started measuring many years ago. That is not just Project One. It obviously is the way our stores are performing, how our associates, 45,000 associates, are working every day to make that entire experience fun and engaging. We are very, very proud of that. We continue to build on that. We'll obviously be remodeling next year. We still have over 1 million sq ft to get out of our fleet, and we're on track to do that. The third one is product. I'm not going to talk a lot about this because this is really Nancy's expertise. If you remember, again, I'll go back to 2006, 2007, particularly 2007.
We really got into more of a fast fashion and a sort of a confusing state relative to our assortment for Jenny. I spent a lot of time before Nancy joined the company really getting back those core tenets that we really stand for. That's the basic assortment. It's also the seasonal basic assortment. Those are the vast majority of our business, and they're very, very important to us. Quite frankly, that's why we enjoyed a positive trend in both 2009 and 2010. It's not enough. That's the reason Nancy joined us about 18 months ago. It was important for us to not only take that core and continue to make that relevant, but also to be fashion relevant. That is to show aesthetic and aspirational looks in our assortment. It has to be at Jenny's price. It has to be within the value context. We needed to elevate our game just a bit, whether it's color, whether it's treatment, whether it's fabrication. It was important for us to do that. With that, I'm going to hand it over to Nancy.
Thanks, Tom. For those of you who haven't met yet, I'm an alumni of Gap Inc. I was here in the 1980s and through the 1990s working in both Gap Kids and Old Navy. I am so happy to be back here. It's been 18 months now working directly with Tom in the brand that I know extremely well and a brand that I was part of help building. I love this brand. Very excited about the opportunity. One of the things that really impressed me coming back into the business under Tom's leadership was how close the merchant and the product teams are to the customer. You heard Glenn talk about that this morning. Old Navy has a great dialogue. We brand our customer, Jenny, Mike, and the kids. We do a lot of work directly with focus groups. We talk to Jenny.
We have a lot of consumer insights, and we're really getting more and more close to her and understanding what she needs and what she's looking for from us. When I joined the brand, I wanted to make sure that I really spent the time going through a lot of that information and talking through what that meant. What she was telling us was, while she loved the brand and she loved the product, we weren't offering her enough versatility for her family to meet her lifestyle needs. We identified an opportunity to do a couple of things. That was first create a good, better, best assortment strategy where we could stretch the assortment. Not add assortments, but stretch the assortment and make sure that we had less redundancy in our offer. That also became our pricing strategy and architecture. We created discipline and structure around that.
The second thing we did was we built a strategy around delivering new product ideas. Whether it was new category growth that we wanted to, new categories we wanted to add, categories that Jenny and Mike were looking for that she was buying from other competitors of ours and not able to buy from us, and again, that met her lifestyle needs. We built a framework around both of those, and those are key to what we've been focused on. Good, better, best. What is good, better, best for Old Navy? This is a clear delineation across three levels and tiers, all categories, where Jenny clearly sees a different level of product, whether it's through detail, fabric elevation, more basic at the opening price point in the good bucket, a little bit more elevation in fabric and detail as we move up.
All tiers are meant to be a great value for Jenny. We're a value brand, and nothing is meant to be expensive. It's all got to be great value for her spend. We have an example of that. In sweaters, big business for us coming up. If you haven't seen the showroom, please come by, and we'll take you through it. This is an example in our sweater category. Strong opening price point, basic business that Tom mentioned. That is the foundation of our business. We drive a huge amount of volume in Old Navy in all businesses in basics and seasonal basics. As we move up into the next tier, this is where we need to have a little bit more emotion, where we charge a little bit more. We use slightly more elevated fabric or the same type of fabric material, but we give her product detail.
She's been asking for more. She's responding to emotional details that we've built into the product. That example is in the middle. The price moves up slightly as we go up. The top is our best tier, which is newer for us this year. That's a small percentage of the business, meaningful percentage of the business. The vast majority still remains in good and better. As we get into the best tier, that's when you see a lot more emotion for her and more overt product and styling details. How's it working? She's responding well to all three tiers. That tells us that the strategy is right. We're learning. It's not perfect yet. Especially in a challenging economic environment, we have to make sure that we watch pricing very closely. In some cases, some of the price ceilings that we've taken to, we've definitely hit a ceiling.
Small number of styles, small percentage of our assortment, and very manageable. When we get the feedback from Jenny, we're, "Oh, maybe that's a little high," we can react to that, and we can adjust. The good news is all of the work that we've done on our fast pipeline and building much more agility into our sourcing process, we're able to react and make adjustments much more quickly than we've ever been able to do. We've made those adjustments that we needed to for the fourth quarter and then into the first quarter. That's good, better, best. New categories and core categories. We need to balance how we approach new categories for Jenny and how we also balance bringing relevance into the core categories. I want to take you through how we think about new categories.
Again, getting back to what is important for Jenny and her family as her lifestyle needs evolve, we recognize there was a huge opportunity in our active business to build a performance tier that did not exist. Jenny and Mike are more active. They are buying performance active from key competitors of ours, and what we were offering were just more basic type products or really more lounge type products versus true active. We went out there and decided that we were going to go after this business, and we decided that we were going to do it in the right way. We've built a level of true technical fabrics with details and fit that are designed to perform with you. We tested this. Compression is a new fabric, for example, that we've brought into women. The fits are incredible. The compression fabric is designed to actually make you slimmer.
The way the design details are done, there's a slimming effect, and it enhances your workout. I've personally tried a lot of these, and they're great. We're getting really, really strong feedback. We tested this in January. We had a strong response, and we knew that we had something that had a lot of potential for us. This fall, we decided that we would rebrand this category. It was called Goga and Rec Tech in the stores. We rebranded it to be active by Old Navy because we felt that it was very important to have credibility and expertise in it in our branding. Goga and Rec Tech didn't take it seriously enough. You'll see this. It's in the store now. It's been in for a month or so. We're actually marketing it on TV this week.
We're considering this a big launch and look for it on TV tonight when it launches. We're very proud of the early results here. That's active. Other new categories for us. As you know, what exists today is primarily a vertically integrated model. We also use third-party brands now more than ever in Old Navy where we can, or third-party partnerships where we can get into businesses that we might not otherwise be able to get into. Fast Lanes is an example of this. If you don't know, Fast Lanes are the reinvention of our register lane business, and we sell everything from water bottles to bottled water. There's a consumable piece of the business and an impulse accessory end of the business. Jenny and Mike, as they're checking out at the cash register, it's right there for them. It's a great business, and they love this category.
This is an example of a business where we work with third-party partners to help us deliver this operationally. Another example, jewelry. I'll get back to this, but jewelry is a new business for us. We're doing that in a very innovative new third-party partnership model, and we're very encouraged by the early results. Jenny loves the jewelry that we're giving her. Licensing. Graphics is a huge business for Old Navy. It's one of our iconic categories that we built when we founded the brand. You guys have heard us talk a lot about licensing growth. This is a business we have consistently grown to be a sizable business now for us in the last two and a half years. This year, what we identified was an opportunity to create a level of localized assortment in the sports licensing end of the business.
We created Superfan Nation, which is a local store-by-store assortment of Jenny and Mike's favorite NFL, NBA, pro teams combined with local NCAA teams. We launched this over Labor Day and are very encouraged by the results. It's a family concept, and she can outfit her whole family in whatever the local team is that we have in the store. Those are great examples of getting into new businesses with help. Old Navy needs these new categories to grow, but we can't rely solely on new categories. We have to have a strong foundation, and we have to have a strong core. The innovation and the work that we do on the core is as important as new.
This is where I am spending a lot more of my time with the team, making sure that we go through all of the iconic categories, the businesses we're famous for, and making sure that we are appropriately putting the right amount of time and energy into the relevance that we need to bring these core categories to the strength that they can become. The perfect puff for the family is an example of this. By the way, bringing the relevance back is so important across the family. We have big categories of business that are not just important in women's or men's, they're big family businesses. This last point is an example of where we're taking a core category, which is our Frost Free outerwear. This is an iconic category for us. We made this famous in the 1990s, but we got a little stale.
In the last few years, we haven't updated this category enough. This year, we decided we're going to go after this. It's actually a fashion trending category as well. It's iconic, and we're bringing relevance now back for the whole family through changing the shape of the product, through color, through how we're constructing the channeling, bringing shine and fabric dimension. We are incredibly proud of this product, and this will be a big idea that we'll market in December. That brings me to the last point, which is what makes Old Navy famous is big ideas across the family. We are a business driven on huge key drivers and very, very big ideas that we market aggressively and that we show up very clearly and concisely in store with. That is one of our biggest areas of focus. If you haven't been to the showroom, please come by.
You'll see it presented very overtly. That is going to be something that you're going to start to see more and more of. We make a very big shift towards that for November, where you'll see every single week we will be marketing big ideas for the family on TV and in store. We're excited about that. Again, as Tom said, you know, we need these ideas to drive traffic. We can't drive traffic with too narrow a message. The focus on big ideas for the family are so important to get her in the store. Once she's in the store, you know, for her to get excited and see the great product that we have to offer.
All right. Thank you, Nancy. I want to end with a couple of things. One is the strategies you saw in the beginning, the strategic imperative. The five strategic imperatives that I started with are not going to change. The target is not going to change. The store initiative is not going to change. Nothing is going to change. We do need to execute it better. We have had, as I spoke to in the creative platform, some of the thinner, if you will, advertising campaigns we had that only were for Jenny instead of for the whole family, have not driven the kind of substantial traffic that we need. I will go into this after I speak to those strategic imperatives. That is just what Nancy said. It has to be bigger, bolder ideas, and it has to be for a broad range of the family.
Occasionally, we will do a female gender or a male gender, depending on the time of the year. We really, particularly at Christmas time, will be sure that all of the messages that we do are clearly for the entire family. The other thing that we've found, and you see, Glenn used a term, and actually, I used it this morning with someone. It's been a distraction. It's been a huge distraction the second half of this year. It has made us try to look at different price points and different, if you will, testing the elasticity of certain categories. Some have worked, many have not.
For us to really look at this fourth quarter in a way that we have to take and look at the core message that we do and be sure that we drive screaming value, which is when this brand truly, truly hunts and when the stores are populated with a lot of excited people. That's the approach that we're going to take in the fourth quarter. The last thing I'll say to you is just a little bit about a new creative platform. I'm going to share a picture with you, which I'm scared to death to share with you because if you take it seriously, it would disappoint me, I guess, at this point.
I do want to share it with you because we're really, really excited about going back to those four tenets: fashion, family, value, and fun, and really looking at a way to bring that fun, quirky spirit back to our creative and to our advertising, not only on TV, but in circular and direct mail and in store. Our teams, our marketing teams have been working with me and working very, very closely with Crispin to come up with what we believe is an incredible, scalable concept, which will be launched in November. It is where all great things at Old Navy have happened for the last 17 years, whether it was innovation, whether it was fun, whether it was screaming value, whether it was energy in the store. All of it is going to be housed in something like that. We are very, very excited.
It really does, for me, and I've been involved in the concept since day one, it really does bring back that fun, quirky spirit that the brand needs to have to really, really hunt. It gives us the flexibility to use it to build up fashion, innovative ideas, new fits in denim, all the way to great, great events on a given long weekend or Memorial weekend, what have you. Please watch your televisions closely and watch your mailbox closely in the month of November and know that this is the new route we're taking. I will also say to you that the SuperModelquins were only on a hiatus. They did a lot of work for us. We are very proud of them. Do not expect them to have gone away.
As a matter of fact, Steve spoke about Japan, and I can assure you that the SuperModelquins will greet the Japanese consumer in those stores just as they do in all thousand-plus stores we have in the United States. We are still proud of them. They've had an incredibly long rest. As most good marketing companies do, they create a portfolio of creative platforms, and that's what we're attempting to do. We stumbled for a minute, but we were innovative, and we were proud to at least take that chance. With that, I will open it up, Katrina, for questions.
Great. Thank you very much. We'll take some questions now for the Old Navy team. Yes, sorry. I can't see your tags.
Thanks. I know traffic is very important, especially during holiday. Have you been able to test the new message at all and get some reaction to ensure that this is really the one that you need to go with for the holiday season?
We've been able to test it with Jenny from a conceptual point of view. It's not just the creative. It's the product. It's the price. It's the call to action. It's the sense of urgency. I'd say to you that Jenny loves the quirky spirit of Fundations Inc. To say that I can actually prove to you that we're counting footsteps per $100 spent, which is the way we measure our advertising, we can't do that until we actually deliver a spot. We have always, the way we handle our advertising is we always go to Jenny first, be sure conceptually she understands, and then we hone it from that standpoint forward. Every single piece of advertising we do, because as you know, we are a TV-oriented brand and a heavy marketer, it's very, very important for us to get hindsight on every single dollar we spend. We do do that.
Great. Next question. Yes, James.
I guess we reiterated the guidance for the year, Sabrina. How do we look at the margin implications of the pricing strategy you just mentioned if a lot of this has, you know, by not been planned the way you described it if you were looking at AUC?
It has been planned. It's baked in. What we said, and I'm not familiar, I'm not, I can't remember the specific date, but when Glenn and Sabrina took the guidance down to $1.40, $1.50, what we are discussing with you today is baked in.
Yeah, question there? Sorry, gentleman here.
Hi. Could you comment on the online business both from a marketing opportunity and as a sales opportunity?
Toby did a real good job of that earlier, but just to share with you, obviously, for us, we're very excited about, you know, the support we're getting from Toby and his team. We do an incredible amount of our business online. We also have an outlet channel, as you know, and we have our regular specialty channel. We're excited about trackable online media. We're a big part of that initiative in the second half of the year. We're looking forward to testing, I call it bricks and clicks, but just direct from store. We need to go slowly with that because of the average unit retail that we do because that is not an inexpensive way to service Jenny. There are certainly opportunities to do more. You know, Toby even mentioned to you that we are certainly his largest volume brand. Quite frankly, the trend that he's had this year has been encouraging and rewarding for us in that total scheme of that 19% comp. We play an important role in that business, and they play an important role in the brand.
Oh, yeah, Marnie?
Thank you. Could you guys talk a little bit about the women's fashion and how you balance your big family ideas with the fashion that Jenny can't resist? Because that's probably very important to you guys as well.
Yep.
I've noticed in the stores a little bit of what I would call almost where-to-work product. I haven't seen it consistently in all the stores. Is this a test? Is it something you're trying to pull together more cohesively the way you have with Active? Just curious about that.
I'll take the first question. Not everything in the women's assortment is a big, big family idea, obviously. Certain things don't translate. We always look at the balance. We have a huge basic knit piece of the business in women's that is also balanced with fashion knits, that sits outside of what necessarily a family campaign is. It's about making sure that we have feminine, flattering shapes. We've actually done a lot of work with getting feedback from Jenny on where we need to streamline shapes. You can see it now as the product is coming in where there's more flattering silhouette. Mark talked about it in Gap as well, where some of the fits were a little bit too boxy.
Making sure that we have those flattering fits for women's, making sure we balance the need to drive a huge business in basics and seasonal basics and key drivers that drive the women's business with the right emotional layer around it, that she can be surprised and delighted when she comes in and sees it. That's how we think about the balance. The second question on where to work. We do not have a where-to-work strategy. What we have is a versatility strategy.
Oh, I'm sure.
No, you know what? We are not a where-to-work brand. I mean, we have a where-to-work brand and it's Banana Republic. We need more versatility. Breezy Blouses is a great example in women's wear. While it did not drive traffic, the product is selling very well. It's a versatile product that she can wear with a skinny jean and a ballet flat out with her friends, or she can wear it to work if she chooses to. We approach that idea as do we have the right amount of versatility for Jenny to meet her lifestyle needs while staying true to what Old Navy is, which is a casual brand. Everything has to be able to go back to a pair of jeans. Everything.
Great. Thank you, Tom and Nancy. I think they will be back in their showroom as well for more questions. We are going to go ahead and move on to Banana Republic. Thank you very much. I'd like to invite on stage Jack Calhoun, who's President of Banana Republic, as well as Julie Rosen, who's our Head of Merchandising.
All right. Hello. After all these years, I have not moved out of the last position. We are last and bringing it home. Okay. What are we going to talk about at Banana Republic? I'm going to go over kind of who we are and what we stand for as a brand, make sure that we're all clear on that, talk a bit about how we've been performing, current performance, and kind of our path forward with a specific lens on product and marketing. All right. Let's start off with a little reminder of who is Banana Republic. Banana Republic is all about providing great workwear for our customers. When I say workwear, I'm very clear that it is versatile work, making sure that we have that versatile work for our customer that they can dress up or dress down.
We all work in a world today of new work, and it's pretty versatile out there. For us, it's about not being too serious. When we get too serious, it doesn't feel like our brand. We need to be in work but not too serious. Our primary focus is in the versatile work area, but we also wardrobe our customer in the area of going out and in the more polished casual occasions. Julie will talk quite a bit about that when we get there. We sit in the category of affordable luxury. A lot of people talk about that. What do we mean? We mean that we are making sure that we offer beautiful design, great product quality, all at a really good price. Those three things coming together is what I mean when I talk about affordable luxury.
Overall, Banana Republic has a very strong and solid economic model. Globally, as Stephen said, there is a lot of interest in our brand, and there's some momentum there, which is great. We opened in London in 2008 with our first store, and we just opened our eighth store recently in Manchester. Some good momentum in the U.K. Last November, you saw some of the pictures in the video, opened a beautiful store in Milan, which is really exciting. We are thrilled that we'll be opening in Paris later this year. A lot of momentum going on. Our franchise business is strong, and it's growing. We just opened a new store in Moscow in Russia. We are now up to 32 total franchise stores in 11 countries. Some momentum and nice to see the brand accepted and demand for it outside of North America.
In North America, we're actually quite solid. While we're good overall, I get there are pockets of opportunity, and we're certainly going to talk about those. Overall, we have a really strong economic model at Banana Republic. Since we brought together the outlet and our specialty business at the beginning of the year, it's been really neat to look at how we leverage and look at those two businesses together holistically. There has been some leverage, and there has been some synergy that we see across the product and the brand and the channels. Let's be clear. There are different channels. They accomplish different things. There are different customers, and there is overlap in the customer. It's really about how we benefit the entire brand and the business model operating in both of those channels. It's about figuring out what can come together and what needs to stay separate.
Since we spoke last year at this time, we didn't hit all of our expectations, but there are a lot of bright spots in the business, a lot of good things happening at Banana Republic. Last year, I told you our goal was to deliver consistent top-line growth. We achieved that through Q4 of 2010, and we did hit a few rough spots at the beginning of 2011. We know our biggest opportunity here is driving consistency, and we need to drive that consistency in our women's business. We believe we've identified those opportunities. Julie's going to talk about them specifically, but our big opportunity is consistency in our women's business. Let me be clear. We're actually really proud of our performance at Banana Republic, especially in our men's business.
We have now driven six consecutive quarters of comp growth in our men's business, which I think is great and says a lot about the team and the brand. Let me talk a little bit about what consistency looks like for us and how our path forward looks. I'm going to talk about two areas: product and marketing. I'm going to start off with marketing. Overall, we are quite pleased with our marketing at Banana Republic. We found a tone and a voice that is very aligned with our versatile work point of view, and it feels brand right. It just feels like Banana Republic. We've been consistent with this brand look and feel for about two years now. I shared it with you last year at this time, and we've remained consistent.
You saw in our holiday setup some of the images that were just up here on the screen, the holiday advertising and the look and feel. It looks great. It feels like our brand, and I'm very proud of it. Look, we'd love to be less promotional overall, but I think the best thing we found in this promotional world to be competitive is how to do it in a brand-right sort of way. We played it Labor Day, which is a big promotional time, but we did it in a Banana Republic sort of way where we did win your salary. Work-focused, inviting customers in, and one lucky person wins their salary for a year. We're doing after-five events to introduce customers to our new collection. When we flow new collection to the stores, we do after five.
For those people that work, come in after five, we have an event, and those have proven very successful. We had to figure out our way to do the category flash sale. We call them power lunch. During the lunch hour, we have a couple of hours, put a category on sporadically, maybe once a month. Those have been successful. We need to be promotional. We know how to do it, but we also know how to do it in a brand-right sort of way. I'm also quite proud of how we're inviting customers into our brand in a reg-priced way and enhancing our product messages. One I'm going to ask a lot of questions about today is Mad Men. Mad Men is a great example of how do we focus reg-price on our brand and invite the customer in.
It's resonated with our customer because it's brand right, and it was executed extremely well. We took it one step further this year. We offered it on Gilt.com 36 hours before it hit stores. We put the collection on there, gave them an allocation, and I'm proud to say it sold out to the piece, and that is all reg sales. That says a lot for the brand. Mad Men has been great for us. Expect more. We are going to do it next spring. We'll have another collection in the spring when Mad Men actually debuts their season. We feel really good about next spring. Partnerships have been good for us. We had Project Runway quite a few years ago. We have an ongoing partnership with Virgin America, Mad Men. Expect to see more of those kind of things out of us. They work really well for our brand.
I think we've been able to leverage them quite well. All of this, though, adds up for us to meaningful improvements in traffic. We've been ahead of the industry for 2011 so far, and that feels good. In 2012, we're looking to build and market on this momentum with a couple of things: maintaining this brand-consistent look and feel, continuing to push innovation and partnerships, showcasing our brand messaging through our traditional media, but really building on that traditional media and filling in our marketing mix and our product stories with stories across varying social and digital channels, as Toby has talked about, and including getting much more product messaging onto our own website. In fact, in 2012, you're going to see Banana Republic start to invest a little bit in our marketing to be competitive and support these great product stories. All right. That's it for marketing.
If I'm going to move on to product, let me talk about product for a second before I hand it over to Julie. We are confident that we know our customer and our positioning is correct at Banana Republic. We are not making any shifts here. Our biggest opportunity is going to be serving that customer in a more consistent way. I'm quite pleased to have Julie Rosen, our Head of Merchandising, up here, who works with me every day, and she's going to talk more specifically about what we're doing here. At a high level, I thought I'd just give you a couple of things that give me confidence in the area of product that makes me feel good that we have the ability to deliver. Number one, we have the right leadership in place at the product level.
Simon Kneen, our Head of Design, and Julie are both incredible talents when it comes to product and merchandising, and they work really well together. They have been with us for multiple years, and they know and they love this brand. Overall, we have a very stable and highly tenured team. We have made one change in our women's design team recently. Deborah Moore joined Simon most recently, quite recently, from Michael Kors. What I love about Deborah is her background and her aesthetic is exactly what the customer wants and expects from Banana Republic. She's a great addition to the team and a very stable team. Second, we have the right product development cycle. A lot of people have talked about our product development cycle. I shared with all of you last year at Banana Republic, we shortened our development cycle by about 25%. We did that last year.
It's working quite well. We feel good about that. Let me be clear. Most of our product at Banana Republic is built on that core collection pipeline. That is the majority. We have strengthened our speed muscle at Banana Republic with two additional pipelines that will allow us to react to trend in our business or trend in the marketplace in as quick as 12 weeks. With those three speeds in our pipeline, it gives us a lot of flexibility to respond to our business but keep a collection-oriented point of view. Ultimately, in product and merchandising and what we do, it's about standing for owning and delivering that idea of versatile work for our customer. We're going to continue to deliver this in men's and keep that consistency going and build our momentum. Women's, we have a path forward of making sure that we offer that versatile work point of view and we narrow down and polish up our casual point of view. With that, I'm going to hand it over to Julie to talk to you a little bit more about product.
Hi there. What we stand for, first and foremost, is work in both men's and women's. Let me be clear. We all know work means different things to different people. To us, work is not too serious. It's trend right while still being elevated. We capitalize on this position of being a where-to-work destination with that sweet spot, as Jack talked about, in versatile work. The idea of versatility is that our customer can dress it up or dress it down based on the occasion. We call it desk to dinner because that helps us make sure that we don't get too serious. Versatility is more important than ever to our customer for a couple of reasons. It really drives value based on the number of times and occasions she can wear something, as well as our customer continues to be cautious and thoughtful in her spending habits.
Beyond versatile work, we also cover the going out and the casual occasions, and we really think that this helps set our brand apart from the competition. Across all occasions, we always remain true to our brand aesthetic of in-the-know, easy-going polish. In-the-know means that she wants to be trend right and current, but she doesn't want to be standing out. Easy-going polish really speaks to that dressed-up, put-together feminine look. Let me just touch on what we learned in holiday 2010 last year because you were all here and saw the showroom, and we heard from many of you that you loved it. Unfortunately, from a product perspective, it wasn't 100% right. We win when we deliver the right balance of occasions, style, and design and quality that our customer expects. Where we have stayed laser-focused on this, we win. We've seen that primarily in our men's business.
Where we've strayed from this path, we've struggled. We see those pockets of opportunity in women's where we haven't been as balanced in our occasion strategies. Let's begin our conversation in men's because we're going to take a lot of those learnings from men's and apply them to women's in a couple of minutes. As Jack mentioned, we are incredibly pleased with the way that our men's business is tracking, six quarters to date of positive comp growth, and we don't see that ending. We believe that there are two key drivers to that success. First, we're delivering the right balance of occasions in our sweet spot of versatile work at the style, design, and quality he expects to find at BR . We see the big drivers of this business in three key categories across men's where we dominate the specialty marketplace. Those categories are sweaters, pants, and wovens.
Sweaters is the first category where we hold the number one market share in specialty in men's sweaters. We do this by offering year-over-year trend-right basics in our merino or silk cotton cashmere in our sweet spot of versatile work. This year, he's really been responding as well to our third pieces, our chunky pieces, our cardigans, and our half zip. Pants is yet another category where we at Banana Republic own the number one market share position, and we're really proud of that. We just launched an incredibly successful third fit in our Chino franchise, Emerson. It's our slimmest fit, so it now sits beside Gavin and Dawson. These are our most versatile work pants and the ones that we are absolutely famous for. Finally, wovens. Wovens is a category we know we dominate in.
We know that the men's wovens market has been flat this year, but our business has been growing. We're sure that we're stealing share from the competition. This is a category that's really successful for us and really helpful that we own all the occasions. We own the work occasion with our non-iron shirts and our slim and our classic fit. We own the going out occasion with our stretch poplin, and we own the casual occasion with our soft wash shirts. We do this all at a great range of prices at amazing quality. This is a category where having all three occasions really benefits us, especially the work occasion. Secondly, for men, I think we do a great job making it easy for him to put it all together and to wardrobe.
All the way down at the store level, we're able to make big statements and show key drivers that cut through, all the while showing him how to put it together for the multiple occasions in his life. He really doesn't need to shop anywhere else. We're also really proud of how this shows up in our men's accessories business. From a key category perspective, we're proud of the big statements we make and where we stand in the marketplace. Now let's turn our attention to women's. I am disappointed to report that last holiday, we over-assorted too casual for her. We loved the product. It was absolutely trend right, but it wasn't what she was looking for at Banana Republic. We know our customer. She hasn't changed, and we know what she wants from us. She wants work, versatility, and quality.
She wants some desk to dinner that serves her lifestyle, and she wants some polished weekend as well as some going out. If it's BR , it's polished dressed-up style, whether it's during the week or the weekend. That said, our true work collections were very successful last year. She really continues to respond to our value proposition and aesthetic in this high-quality option. I hope you either came to the showroom or will come at lunch that you can see how we continue to deliver on that. Let me tell you what you can expect from us at Banana Republic from Q4 and beyond. First, a laser-like focus in true work with our sweet spot of versatile work.
We're going to continue to give her covetable options from desk to dinner where we offer trend-right items that don't get too serious, all at the price that she expects to pay at Banana Republic. In Q4, we're going to also layer on that dressed-up option for her going out occasion. We know that's a competitive advantage during this time of year. We will continue to stress versatility in those offerings. Second, we're narrowing and dressing up our casual offerings. We'll give her that more polished trend-right look for the weekend at the quality she expects and is willing to pay for. Third, similar to our category-dominant strategy in men's, we have a laser-like focus on our category strategy for women's. In 2011, we're just building on the successes that we saw in 2010. Let me take you through the categories that we're going to dominate in in women's.
First and foremost is dresses. This is a category that we identified as a huge growth opportunity for us last year, and we want to own this in the marketplace. The teams have been absolutely going after it and delivering. They're going to continue to deliver in more work-appropriate dresses, as well as those key seasonal opportunities. We're especially proud of our Mad Men collection. Currently, in dresses, we offer a range of silhouettes, sleeve lengths, and price points. She is absolutely loving it and responding to it. I'm proud to announce that we're running double-digit comps year to date in women's dresses. Like men's wovens, dresses is a category where we cover all occasions for every season. You saw them, I'm sure, this summer in our long patio dresses. You've seen them in the showroom today in our party dresses, all the while protecting our covetable work versatile dresses.
Next is sweaters. We are a market leader in our specialty competitive set in sweaters year over year, and we want to continue to dominate in this category. We want to own the sweater category in Q4. We will look to Q4 to bring our brand-defining third pieces in new silhouettes and textures. You'll see an amazing range of key drivers in beautiful colors. Color is back at Banana Republic as well, not only Gap. You'll see novelty gifting and colorful cashmere. Finally, knits. Knits is a place where we absolutely compete and want to continue to compete. We win with great style and design that she's willing to pay for. We have done a great job of offering a balance of the key layering pieces and the trend-right fashion pieces, and she seems to continue to respond. Let me summarize.
In women's, we're going to continue to own these key categories of dresses, sweaters, and knits. We're going to cut back and dress up our casual offerings. Most importantly, we are going to dominate in versatile work. This does give us tremendous confidence in Q4 and beyond. As Glenn mentioned and Jack mentioned and Mark mentioned, we've all been ramping up our speed capability across both men's and women's. For us, it's really just another weapon in our arsenal that allows us to get trend-right product to our customer quicker. While the base of our product is on our core pipeline and we're not a fast fashion player, we do see higher margins and higher AURs in our speed product. The speed pipeline really just helps us get the trend to the customer quicker, as well as it helps us react to our own business.
Finally, we're really excited about opportunities to expand our brand in the right way. Fragrance is a category for Banana Republic that's been incredibly successful. We launched Wild Bloom last year, and not only has it been well received here in North America, but abroad as well. You will see us launch two new fragrances next year, one for men's and one for women's. We're also really proud of some of the partnerships that we have with Adidas and Clarks. We're going to continue to pursue brand-right product partnerships as the opportunities arise. With that, I'd like to turn it back over to Jack.
All right. Just to finish up, our goal in 2012 is really the same as it was last year, really drive that moderate, consistent top-line growth. I feel like we've got the right team, obviously. We've got the right strategies in place to help us deliver on it. It's all about getting our women's business on track, doing the things that Julie just talked about. We can bring that consistency in women's up where it has been in men's and at the brand level. I think with where we are in product and marketing and the things we have in place, I feel confident that we can get there. For that, I'd like to open it up to some questions.
Thank you. We have time for one or two questions for Jack and Julie, and then they'll be in the showroom too, so you can ask some questions. Yeah, Kimberly.
Over the last several years, there have been a couple of sort of mild course corrections. The brand and the product got a little too serious. I think recently you've talked about it getting maybe a little too casual. How do you provide guidance or guardrails, if you will, to try to deliver consistently on your product goal?
Yeah, I'll do two things. I'll talk a little bit about the brand, then you can talk about your product filter. I think number one is at the brand level, being very clear that we are about work and work versatility. For us, the idea that we work today means a lot of things to people. We need to sit in that space of being about work. It doesn't mean we don't do those other pieces of business, but it's got to fit in that work versatility. I think as long as we stay focused on that, we can get there. Julie and Simon have spent a lot of time on how do we get those product filters clear so that we don't make those swings. They have not been big at Banana Republic, but they're still swings. That's why we've missed. We got too serious and then too casual. We need to get that on. You want to mention that at all?
Yeah, I mean, I think that Jack's hit on it. It's really honing in on those filters. I think when I first came back to the brand, yes, the work had gotten way too serious and the work occasion too big and take full responsibility for a full swing into casual. That casual bent was really the trend and what then was what was happening. I think that based on what's happening in the world today, versatility is more important than ever to her and to him because they want to be able to dress things up and dress things down. Simon and I have worked really hard on just being clear on our product filters and ensuring that all products fit through them. We remain true to that.
I think part of that is that trend. There is trend out there. We're now having trend meetings where we say, there's a trend out there. There's a trend coming in neon. We looked at that and said, yep, we see the trend. It's not Banana Republic. No. We look at a trend and say, for us, if so us, when? There are a lot of trends that we shouldn't participate in.
All right. Yeah. Adrienne.
As you do more and more abroad, particularly in Europe, where the trends come from, are there any designs specifically or any intention to design specifically for European product, or is it all going to be the same?
Yeah, we have one line across the world, and that's what we've always had at Banana Republic. I think it's been successful. We make sure that we, with Japan or places in Europe, we might have 10% or 15% of the line that we do some specific things, which I think the design team loves. Let's make sure that we're locally relevant. At the core, 85% of what we do is the same product around the world. It's a different fit in Japan and in Asia, but other than that, it's the same product and same marketing.
Great. Thank you, Jack and Julie. With that, we're going to invite Glenn and Sabrina back up on stage to close the meeting. Thank you.
Okay, time is a little precious right now. I'm going to give you a couple of thinking comments. I'd say they're mostly rooted in my observations from the day and maybe putting a little bit of an exclamation point on a couple of points you've already given or two. I'm going to do that. The one thing you've got to promise me. Did you miss that? Here's the exclamation point. I've got a couple of points to make at the very end. You have to promise me because a lot of you never got past the Gap showroom. I know it's our 42-year-old brand, but it's one of four brands we have in our showrooms that we're set up. A lot of people put hard work into it.
The people in the front row are going to be there to answer your questions, but you got to go see Banana Republic. It looks amazing. You got to go see Old Navy because I walked through yesterday with Nancy, and I can't believe some of the stuff she was talking about today. The real dedicated category messages are very strong, and I think it answers a lot of the questions that some of you asked, but also some of the points Nancy was making. Third, you have to go see Athleta because 50 of you came to the store last night, which is fine. Nobody was taking attendance, but 50 people, except for me, 50 people showed up, which is fine. That's completely fine. It's a Thursday night. I get it. The Athleta showroom is great, and it shows the product, and it shows how it's a four-season business.
You need to see that. Pipeline also, as Toby talked about apparel, you should go in there and see it. Jen Goslin, Tess, all the merchants you saw today are going to be there. I'm going to quick closing, a couple of questions, and then if you can get to the showrooms, around 1 o'clock ., for those of you who have the time, down on the 11th floor, there's a lunch available for you on the 11th floor: Pam Wallach, Seth Farbin. Again, I'll open with a few comments about the Gap Global Creative Center, and they have a presentation for you to talk about, I think, to give you a little more examples and to show you what Art and Mark talked about. Pam, it's important for you to meet Pam. She's running the center. She's doing product around the world.
She wants to show you spring and take some of your questions. Observations. We talked about strategy. There wasn't a big change. You've heard us say before, multiple brands, channels, and geographies. The key thing I want to leave you with is we have the ability through, I think, anybody who attended the Bank of America Conference, we're at the very end of that conference. Good bank, Bank of Montreal. No insolvency there. At the end of that conference, I put up something called the soundboard, which showed you the pace in which we can move our initiatives forward. We have the ability through whether we want to accelerate things in China, whether Steve has some concerns going on in Europe with Italy. We have the pace, the ability to pace and sequence anything we talked about strategically.
The brands who spoke to you today, and I mentioned this a little bit when I was talking about sharing American style around the world, when they were talking to, and I was talking about some of the competitive advantages, the big thing that our brand presidents are working on in our domestic business, and Julie talked a little bit about where she wants to dominate, how she's going to win. I keep coming back to what are the competitive advantages in our business. Because winning is one thing. What are those advantages? They have to start on product. What are the categories? What are the products? Who are you up against competitively? Who are you taking share from? What are our advantages? Why Gap? Why Old Navy? Why Banana Republic? Why Athleta? Why Piperlime? I can articulate some of those.
It's a longer answer, but at the end of the day, our team is spending, we've always understood this to be successful. How do you differentiate? How do you win? What are your advantages? We're spending more and more time going deep because the last thing we want to be is five brands that are an inch wide, an inch, sorry, an inch deep and a mile long. We want to really look at the key things we can win and how do we take some of those and go very deep on it and make sure the differentiation is heard and seen by customers every single day. The economic model Sabrina took you through, I mean, it's a very solid model. We put a lot of time into leveraging it, thinking through exactly how the P&L works.
That's why we flashed 2010 and to show you with a one comp and a 3% total sales how we can really leverage our P&L with multiple tens of millions of dollars into the P&L in 2010. It's a very solid economic model. As a few people I was talking about earlier, Marnie and a few other people were saying, if you get the product going now, which is obviously part of today's meeting, you get the product going consistently, you run it through that economic model, this business, as Sabrina touched on, obviously, we're confident that the 13.4% is a target we're going to get to. Again, we're not committing to time. It's a number we're going to get back to. Steven talked to you about International just quickly. Big runway for us on International. Big growth opportunity. What Steven didn't mention is we have teams on the ground.
We have a Managing Director in Europe, Managing Director in Japan, Managing Director in Shanghai, Managing Director of Franchise. Steven runs all of International. He has very, very solid experienced teams that are local, but also come from the U.S. business. We've taken some of our best people. Some of our best people in the company have gone to seed senior roles in our international offices. One thing also that I think Steve was trying to get across is the business, I would say, up until two or three years ago was local global, and now our business has become global local. We're global businesses. There's local needs in Japan and China and the other markets, absolutely, in our franchise business. That's why you have merchants in each one of those teams that buy off the line that is absolutely custom-made for what is right in their market.
We're much more of a local company through the collaboration that goes on around the world, which somebody asked earlier, which was a very good question. Why am I seeing stuff? It was from this side of the room. Why am I seeing stuff in the international business, in stores, in product I don't see in the U.S.? Great question. It drove me as crazy as it drove you. I think bringing everything together now, having one point of contact at International, the working relationship between Steve and Jack and Tom and Art and Toby is very strong. They understand we want, there's no pride of authorship. We want the best, particularly when it comes to product, the best product, the best talent, which is what the GC squared is, having the best talent from around the world to put into our 1,300 Gap stores.
New brands, Toby talked on, Athleta and Piperlime. I feel very good we're at right now. It's early days, but they're going to make a big difference to the business. I think that that was an important message. What Toby talked about, and this is his quote, he always has these little funny quotes, but he was saying we're turning our guns on the domestic business in a good way, is that we've asked Toby for the last 18 months to get us on a global platform for online. That took a lot of work from a lot of members of his team. That's in place now. There's still more work to do to get to the penetration we want of online total sales around the world.
Now him and his team, who are highly talented, who have a track record, a proven track record in Gap Inc., are turning their attention to what they can do to help our domestic business win. From ship-from-store, mobile, trackable online media, which he could have talked to you about for 10 minutes about what that is as a tool. Here's what I'll tell you about Toby's team. They don't, they rarely finish second. They're a team that perennially have gained market share for six years in a row, even though there's been seasons where the product may not have been to our liking. The talent in that team to leapfrog, this is the word I'm using, Toby, you didn't say, but I'll add it to your repertoire. The ability for Toby's team to leapfrog what's going on in so many of these other areas, I feel very confident about.
Last two things, product consistency. This meeting could be a couple of days and really getting not just the three key merchants, design people, Simon Kneen, or you're making the design leaders here, our merchants from around the world. We understand that one thing that's been elusive to us, and I've certainly been frustrated this year, and I talked about the distraction factor earlier, is our inability to have consistently great product. We're focused on that. The team here knows it. It's a non-negotiable because the company here doesn't want to win on strategy. We may have a good strategy. We know we have great brands. The company here is going to win on product. At the end of the day, that's what separates the real top companies in our sector from people who just do well.
The people you met today, myself included in Sabrina, are not working at Gap Inc. to just do well. We're here to win, to be the top company when it comes to apparel. We're not throwing out wild projections as other companies may do. We measure our definition of being one of the best apparel companies by all the reasons we talked about already strategically, but to consistently deliver great product is going to be key to that. I hope what we showed you today is as the two of us have been partners in business now for four years, and we complement one another, and we fight like crazy when you guys aren't around. We disagree. That's just, that's the relationship between a CEO and CFO. What I tried to show you today is this is not the only partnership that you should be privy to.
Obviously, you have a partnership. That's why we put people up here. Jack and Julie are partners. Nancy and Tom are partners. Art and Mark are partners. Toby has a partner. Debbie's not here today. Scott Key, who runs Athleta, has a partner named Kelly Cooper. Jen Goslin, who's here today, has a partner in her business. We have tried to create this inside the company. If you're looking for anybody to be just one-dimensional who runs our business, to only be a merchant, to only be an operator, to only be a marketer, we've tried to get the best at the top of the business. Yes, somebody has to run it, and somebody has to call the shot, and somebody's ultimately accountable for the results. What we tried to show you today is we've created partnerships.
People we know how to run businesses who are strategically sound, who are operationally disciplined, get the fact that product is the most important thing we do, and marry them up with somebody who you heard today speak to you about product. They live it and breathe it, and that's what they care about. That's the sort of collaboration we were trying to show you today. I'm going to shut up now. We will take a couple of questions, but please, anybody leaves here, I'm going to be watching you walk to the showrooms. If you have time, please join us down on the 11th floor where the showrooms are paramount. Just a couple of questions before we close off. I have eight choices.
I'm trying to look for somebody who hasn't had a chance. Question there in the middle? Sorry.
All right, thanks. It's Omar Saad from ISI Group. One of the themes we heard a lot today was women's and a lot of the focus that needs to be placed on the business. It's definitely admirable that you're shining the spotlight inward and evaluating your execution there. Have you thought about or analyzed what's happening in the marketplace in the women's apparel category? It's been tough for a lot of companies out there. Perhaps there's some other kind of structural issues or fashion issues going on in the marketplace that perhaps aren't specific to Gap Inc., and how that would inform your strategy and execution. Thanks.
Yeah, that would certainly be me letting people off the hook because even though, you know, people will say this is a color cycle, this is a women's cycle versus a men's cycle. There was a skinny denim cycle for the longest period of time. At the end of the day, I think there are people even in a cycle that may not be buoyant who are doing well. Look, we track everybody. We're in stores. We've got competitive information. We know who's doing well. We're not, there are people, I agree with you, who may be in specialty apparel, who are women's based the way we are, whose comps have not been that strong in the first nine months.
When some of the department stores who are doing very well right now and speak about their numbers, you hear them reference cosmetics, handbags, shoes, men's, women's is kind of absent. We kind of get that. The most important thing we get besides our own intuition and God-given talent that the merchants and designers have, knowing whether people are responding to our product, whether it is a good cycle or not, somebody in the business designed it. Somebody gave input into it. Somebody bought it. Somebody put it in the store, and we bought it to a plan. If it doesn't sell to that plan with the understanding that maybe the cycle may not be as strong as we want, I still want to know who's accountable for that.
We still hold our merchants highly accountable to making decisions because if there's something in women's that we feel strategically, as I think Art touched on this, when it comes to buying of inventory, we're not feeling as good about women right now and the cycles available and their passion to refill their wardrobe, then we can buy another category. We have men's, we have accessories, we have kids, baby, we have lots of choices. There's a lot of categories in women's. They're not driven as much by just pure trend. It would be easy for me to let the three people you saw today off the hook, but what I say is when it gets difficult out there, and let's assume that you're right, that the marketplace for women's is a little more challenging right now, that should be the best environment if you're the best company.
The distance you create between yourself and an average company should grow during difficult times, like our P&L did from 2007 to 2010 during tough economic times. The cream always rises to the top. That's the challenge and the pressure on the people you met with today. We will get to that top with the focus we've been talking about internally for the last six months. We're going to get there.
One more question, and then I know Glenn and Sabrina will be around during the lunch hour.
Can we do showrooms?
Showrooms. How about in the back back there?
Thank you. One desk of balance sheet question. You came through the recession. I see Glenn's already handing off the mic. You came through the recession with a very strong balance sheet, very low debt, primarily lease obligations. Earlier this year, you decided to tap the debt capital markets, add a little leverage. Can you talk a little bit about your thinking in terms of coming to the market, adding some more debt on the balance sheet? How is the board involved, and what kind of metrics do you plan to manage to going forward?
Yeah, I think overall, just to repeat our thinking for the year when we did that, it was really no change in our overall philosophy. That's an important principle to just outline again. We consider ourselves very conservative balance sheet managers. We have targeted $1.2 billion as our targeted balance sheet amount because we don't want to be reliant on capital markets for our funding. That's plenty for our working capital as well as a reserve for any downturns. Nothing about our philosophy has changed. The financing in the spring was really an opportunity to come to market after many years after we had demonstrated that through positive comps and negative comps, our cash flow generation remains steady and strong. We felt very comfortable that given the market dynamics, it was a nice opportunity to give us more flexibility.
We've, of course, kept our debt levels at, you know, what I consider prudent levels. We have in total now funded debt of $1.65 billion. We don't have any current plans to raise any more debt. Our investment grade ratings, which we've worked very hard to earn, are important to us. We absolutely want to work to maintain them.
Great. We want to thank everyone for joining us today. Do you want to?
I was going to say what you just said.
Oh, okay. I really hope that you guys found this all valuable. We want to thank all the speakers who contributed today too. The showrooms are set up, as Glenn mentioned. We really hope you get there. A couple of logistics for those who want to stay for the GGCC presentation: there is lunch in the elevator bank where you guys came in, grabbed some lunch.