Good afternoon, ladies and gentlemen, and welcome to Gap Inc.’s fourth quarter 2006 conference call. (Operator Instructions) I would now like to introduce your host, Evan Price, Vice President, Investor Relations.

Good afternoon, everyone. I would like to welcome you to Gap Inc.’s fourth quarter 2006 earnings conference call. For those of you participating in the webcast, please turn to slides 2 and 3. I would like to remind you that the information made available on this webcast and conference call contain forward-looking statements, including but not limited to forecasts relating to the timing of the Forth & Towne closure and the conversion of Old Navy outlet stores into Old Navy stores, diluted earnings per share excluding Forth & Towne’s net loss and on a GAAP basis, free cash flow, anticipated annual dividend, operating margin, year-over-year change in inventory per square foot, gross interest expense, depreciation and amortization, capital expenditures, effective tax rate, store openings and closings, and weightings by brand, real estate square footage, expenses and annual savings associated with the conversion of Old Navy stores and the closing of the Northern Kentucky distribution center, plans to repay debt and use of cash to repurchase shares, as well as other statements that express our expectations, anticipations, beliefs, estimates, intentions, plans and forecasts. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those in the forward-looking statements. Information regarding factors that could cause results to differ can be found in our annual report on Form 10-K for the fiscal year ended January 28, 2006. Investors should also consult our quarterly report on Form 10-Q for the quarter ended October 28, 2006, and today’s press release. Future economic and industry trends that could potentially impact net sales and profitability are difficult to predict. These forward-looking statements are based on information as of March 1, 2007, and we assume no obligation to publicly update or revise our forward-looking statements, even if experience or future changes make it clear that any projected results, expressed or implied therein, will not be realized. This presentation includes non-generally accepted accounting principal measures, free cash flow and expected diluted earnings per share excluding Forth & Towne’s net loss, which under SEC Regulation G, we are required to reconcile with GAAP. The reconciliations of these measures to GAAP financial measures are included in our earnings press release, which is available on gapinc.com. Joining us on the call today are interim CEO, Bob Fisher; CFO Byron Pollitt; Gap Brand President, Marka Hansen; and SVP of Corporate Finance, Sabrina Simmons. Now I would like to turn the call over to Bob.

Good afternoon, everyone. Thanks for joining us. I am pleased to be addressing you as interim CEO for Gap Inc. Though it is not my intention to be a candidate, I am fully engaged in moving this business forward until we name a permanent CEO. I am excited to be in this role because I am well aware of what this company is capable of. With more than 30 years of professional history here, I have a deep appreciation for our creative culture and the exceptional talent we have. Today I would like to talk about my priorities and share my early insights on what I believe is necessary to get our business back on track. Then we will review 2006 performance. Along with me, Byron will discuss the financials in more detail and Marka Hansen will share her initial impressions on Gap Brand. I have spent the last six weeks getting closer to our strategies and operations and meeting with employees at all levels of the organization. It is clear we have a lot of hard work ahead, but I believe that this company still has tremendous potential. For the coming year in 2007, our teams are focused on improving the fundamentals and stabilizing the business. Although we will make progress along the way, it will take time to restore our financial performance to competitive levels. There is no quick fix. We have recently put new leaders in place who are just now ramping up, but let me leave no doubt: I am confident we can and will regain our momentum. My first priority is to fix our core business. This means putting the right product and store environments back at our Gap and Old Navy stores and reconnecting with our customers by having a clear customer target. We…

Thank you, and it is great to be back at Gap Brand. In my 20 years with Gap Inc., I have had the opportunity to experience many facets of the business, from merchandising to human resources to taking Gap brand international. Having already spent nearly a decade with Gap, I truly have a passion for the brand and I am energized by the challenge of turning around this business. Given my tenure with the company and many experiences in both up and down cycles, I am very clear on the scope of the issues we face and I understand the complexities of navigating such a large effort. Today, I want to share with you my initial thoughts on the business and provide some insight into our immediate priorities. First, I believe the kids, baby, maternity and body business strategies are on track and there are opportunities for growth in both divisions. Clearly our biggest challenge is the Gap adult business. Because we have strong leadership with Pam Wallach in kids and baby and Tom White in body, I will be able to focus on the turnaround for Gap adult. In the adult business, we have disappointed our customers for too long and my immediate focus is on getting the product right, improving the customer experience and smart inventory management. Let me start with what I consider our number one priority, and that is product. I know that in order to deliver amazing product with great fit and quality, we are going to need the right creative talent on board. We need a distinct point of view and we must lead with creativity and innovation. Fortunately, we have a strong operational team in place, so I will be focused on acquiring, nurturing and developing our creative talent. In order to produce…

Thank you, Marka. Good afternoon. I will begin today by reviewing fourth quarter results and then provide an update on our outlook for 2007, which will include the financial impact of the initiatives which Bob has described. First, fourth quarter results; net earnings were $219 million, or $0.27 per share. Gross margin decreased 150 basis points to 32.5%. We generated $678 million in free cash flow this year. As a result, we ended the year with over $2.6 billion in cash and short-term investments. We increased our quarterly dividend to $0.08 per share and finally, we have utilized about $550 million of our $750 million share buy-back authorization by repurchasing 31 million shares, of which 14 million shares were acquired during the fourth quarter. For webcast participants, please turn to slide 4. Fourth quarter earnings were $219 million, or $0.27 per share. Please note the fourth quarter effective tax rate was 41.1%. This compares to a full-year effective tax rate of 38.4%. Full-year earnings were $778 million, or $0.93 per diluted share versus $1.24 last year. Fourth quarter weighted average diluted shares were 818 million, and full year weighted average diluted shares were 836 million. Please turn to slide 5, sales performance. Fourth quarter total sales were $4.9 billion, up 2% versus last year. Total company comp sales were down 7% in the quarter versus down 6% last year. Full-year comp sales decreased 7 and total sales were flat at $15.9 billion. This 7% spread was driven primarily by net new store openings and a 23% increase in online sales. Please refer to our earnings press release for total sales and comps by division. Turning to slide 6, gross profit. Fourth quarter gross profit decreased 2.3% to $1.6 billion. Gross margin was 32.5%, down 150 basis points compared to last…

Thanks, Byron. Looking forward, I am committed to the priorities that I outlined earlier. At the end of the day, our success will require extreme focus against the things that matter most. To me, it is tapping into the passion of our employees and re-instilling creativity and innovation in everything we do, and it is about simplifying our work at every turn. Every day, we are uncovering new ways to get back to the product-focused and customer-focused company that made us an American icon, but as we reinvigorate creativity into our business, we will never lose site of the importance of financial and operational discipline. These things can and will stay in healthy balance. At the beginning of my remarks, I said I was excited to be leading the company at this time. Let me tell you why. We have powerful brands and passionate people. Every day I am energized by the amazing talent and resolve that I see in the people who work here. This gives me confidence that we will get back to where we need to be. We have been tested before and we have demonstrated our ability to overcome adversity. Working alongside the management team and the Board of Directors, you have my commitment that we will chart a new course to reinvigorate our brands and deliver strong returns to shareholders. Now, we would like to address your questions.

That concludes our prepared remarks. We will now open up the call to questions. We would appreciate limiting your questions to one per person.

(Operator Instructions) Our first question is from Gabrielle Kivitz of Deutsche Bank.

My question is on the Gap division, so I guess it is a question for Marka. I hear what you are saying about returning the brand to its heritage, but I am just curious if you could elaborate a little bit more. The marketplace is obviously very different than it was when the company was achieving peak metrics. I think some of the key items that you had previously focused on have become much more commodity like. The environment has become much more competitive. We are seeing a lot more pricing pressure. I just wonder if you can talk about your thoughts on the differences in the environment, talk about how similar or different you think the brands will be, more specifically the Gap Brand will be when you are through some of this repositioning, how different it will be from the brand we remember.

I absolutely know that we are not the brand of 10 years ago, nor the brand when I was here in 2002, but I know this: we do need a narrow target focus and it does not mean we cannot halo older or younger, but we need to aim at a more narrow focus. That being said, I think the categories that are our heritage, those being things like denim, like clean bottoms, like being there for people who want either casual work or casual weekend, that we can reclaim an authority position there and that is my intention.

Our next question is from Dana Cohen of Banc of America Securities.

Just two quick things. First of all, Bob, maybe you could just help us on the search process, sort of a timetable here. Months have already passed, still have not hired a search firm. Obviously I have never done this, but can you just help us understand, is this the normal timeframe? Particularly since it does not seem that the number of people to go after is that large. Second, on the store growth at Old Navy, just help us to understand why keep growing it now, given the trends in the business?

Dana, on the search firm, we are literally in the final stages of selecting the firm. The committee has not been sitting idly. Conducting a thorough decision on the right search firm takes time and the Board is committed to selecting the right CEO. So again, we have not been sitting idly and we are just about to finish this process up.

Dana, with regard to the Old Navy openings, let me just first clarify; of the 115 openings that we have listed, 45 of those are conversions from Old Navy outlet to regular Old Navy stores, so it is not quite as many as it might first appear. On a net basis, because we are closing some Old Navy stores, it is only 50 net new openings and each one of those store openings have been individually pro forma’d, reflecting the current trends in the business. It is good real estate with attractive returns and that is why we are adding them to the fleet.

The next question is from Margaret Mager of Goldman Sachs.

I have a question on the marketing expense outlook. I think both Old Navy and Gap stores both said that you will be cutting back on the marketing. I am just wondering how much you expect the 581 to drop in ’07. What is factored into the $0.80 to $0.90 EPS guidance? I am not clear from the presentation. What is it that is driving a down year in earnings in ’07 from your perspective? Thanks.

Let me talk about the marketing spend reduction. We made significant incremental investments in 2006 and when we took a look at that, it just did not pay off, so we are pulling back from where we felt we were the prior year. I think it is a smart business decision. In Gap, it is principally TV advertising. At Old Navy, it is around print and promo events. We are still committed to marketing.

I was hoping for a sense of magnitude in terms of where you go from 581?

Margaret, you know we do not guide to specific marketing numbers but you should -- just as Bob said, we made incremental investments in ’06, did not deliver the return we were looking for. We have decided to cut that back from where we were as it relates to the incremental investment. With regard to why guide down, our attempt here is just to be very realistic with regard to our earnings prospects. We have Marka and Dawn in the early stages of resetting the direction of our two major brands. It is no quick fix. ’07 for us is about stabilizing the businesses and we frankly just through it prudent to limit expectations for 2007 and provide a wider earnings range in our outlook.

With all due respect, you are talking about cutting expenses. You are cutting marketing, you are focusing on your inventory -- is it sales? Do you expect sales to be your primary issue again in ’07?

I would say that, yes, that we would expect -- what we are attempting to signal is that ’07 is a transitional year in terms of trying to stabilize our sales trends. With regard to expenses, we are very serious about tackling our expense position. When you look back to 2003, we have added a meaningful increment to our expense base with the anticipation that we would have significant growth on the top line. That growth has not materialized. The seriousness with which we are taking a hard look at expenses I think is indicated by the type of initiatives that we have already discussed and, as I am sure you can appreciate, in order to take expenses out of a cost structure in a way that will not allow them to so easily creep back in, this takes time to thoughtfully do and it often is accompanied by one-time expenses, which we also have to factor into our guidance.

The next question is from Jennifer Black of Jennifer Black and Associates.

Good afternoon. I wonder if you could comment about Piperlime. Could you give us some color on Piperlime?

We are very encouraged with the start of Piperlime. Recognize that we only started it three months ago from a standing start, where the satisfaction and intent to recommend customer reactions are off the charts in our post-fulfillment surveys. Operationally, we have had no hitches. We have a healthy customer mix between shoppers that are sourced from our existing customer files and from brand new customers. At this point, we three months into it. We have successfully leveraged an existing platform and we are successfully leveraging our existing customer file and marketing database. We are very encouraged, but we are just -- it is three months into it.

Is it profitable, or close to profitable?

We don’t talk about that just yet, but we look forward to the point where we will be more specific about the financial results. We are just getting started with this so it would be premature to talk about economics.

The next question is from Barbara Wyckoff of Buckingham Research Group.

Just a couple of questions. Could you talk about the size of your online business overall and by brand? You did say it grew 23%. If you could give us some insight on projected margins by division, where would you think they should go say two or three years down the road from now, by brand?

The size of the online business is $730 million for the year and that -- consider that virtually all base business, the base brands of Gap, Old Navy, Banana Republic -- Piperlime immaterial contribution to that at this particular point in time. We will be pushing the brand, the direct sales for each of our brands as in our 10-K, so that you will see it there. We do not at this point, our margins below the aggregate -- we do not disclose margins for the Internet. But I will tell you that our Internet business is very healthy, strong returns to capital, very profitable, full cost P&L.

The next question is from Brian Tunick from JP Morgan.

First one for Byron, just on the under-performing stores. It sounds like a couple of years ago, we cleansed the store base, so just curious how much those stores are under-performing, whether or not it is return on sales or on a sales basis. And then maybe someone could comment about the media speculation that you guys have hired Goldman Sachs to explore strategic alternatives. If you hire somebody, does that change perhaps the outlook? Would you still consider splitting up the company, as again has been reported in the media? Thank you.

Let me start first with the store closures. You are absolutely right in the sense that we have done quite a bit of cleansing. The vast majority of that cleansing has been with Gap Brand. Since 2002, we have closed over 400 Gap stores. We are planning to close another 80 in 2007. As we look to the future here, I think what is important to recognize is that it is important to give Marka and the team some time to lock down their customer target and to get the product right, because when both of those are settled, we will be in a much better position to right-size the fleet for Gap. I do want to add to that that when we go through an individual store analysis, we do not simply assume today’s performance and sales productivity levels. We do a full return on investment and calculation for a store that does assume some improvement in productivity.

Byron, let me answer the second piece of the question, or the first piece of the question. We do not comment on market rumors. We never have. My efforts and the team’s efforts are focused around turning around the Gap and the Old Navy business. We are making the necessary changes. I think if we do that, it brings tremendous value to the shareholders. Like any responsible management team, we periodically evaluate alternatives to drive shareholder value but let’s not forget what has happened in the last six weeks here. We have a new CEO. We have a new Gap President. We have announced the closing of Forth & Towne. We have converted the Old Navy outlet to the Old Navy stores. There are no quick fixes in this business. We are taking a serious, in-depth look and we have to allow appropriate time for the leaders to asses their businesses.

The next question is from Paul Lejuez from Credit Suisse First Boston.

Marka, can you maybe talk about your role in the Gap brand turnaround back in 02-03? What do you see as the similarities today and then what are the big differences?

In 02-03, I was focused primarily on adult and all-around merchandising, visual and planning. I do not see anything any different there. There are tons, great talented people here with lots of great ideas. I think it is just about focusing the team, focusing on just compelling product assortments and a great store experience. It is not that difficult. It is just about getting everybody pointed in the same direction and being absolutely relentlessly focused on great product and great creativity, and there is plenty of talent in the team to make it happen. I do realize it is not the Gap of when I was there, so I am being very careful to make sure I do not just go back and say what worked for us in 2002 because the landscape is different. But in terms of how you fix businesses, I have done it a bunch of times and I really like to do it and I am going to do it again.

The next question is from Richard Jaffe of Stifel Nicolaus.

A question on CapEx, given the expense cutting and the store count that on an absolute is very similar to last year’s level. Why the increase in CapEx by about $125 million?

All of the increase is concentrated in remodel. The amount on new stores is very close to what it was last year and as I am sure you are aware, we have said for some time that we are behind the curve in terms of refreshing our fleet, and so both Old Navy and Gap are receiving an incremental increase in the amount of remodels, a budget for the coming year. We feel this will play an important role in our turnaround.

Could you just remind us of the number of remodels last year and the plan for this year, by division?

What I will do is give you Gap, so last year, we did about 25 remodels for Gap. We are planning 75 to 100 remodels for Gap. I do not have Old Navy’s remodels for last year handy, but what I can tell you is that the remodels for Old Navy are approximate to the number of remodels that are planned for Gap this year.

Got it. And just a question for Bob, given the process that has to occur with selecting a headhunter, or a headhunting firm and then proceeding with a search, and given the time that it took last time the firm did a CEO search, it could be quite some time. I was wondering, Bob, are you committed to staying the course for what could be six months or longer until a new CEO is found?

Absolutely. I am fully engaged in driving the business forward and I will do that until a permanent CEO is found. I have committed that to the board and we will do whatever it takes.

Could you be convinced to participate in the search yourself, or be a target of the search?

It is not my intention to be a candidate. The Board asked me to take on the role as Interim CEO.

(Operator Instructions) The next question is from Jeff Black of Lehman Brothers.

I guess a couple of questions. First, for Mr. Fisher, I was surprised to hear your reply to the benefits from purchasing power from the three divisions really do not go down to the supply chain. Given that and given the complexity that we face with multiple divisions and a Europe division, what are the thoughts for keeping everything together here at Gap as you look at to hire a new CEO? Why not cut off Europe, sell Banana, do something that would really refocus this chain on Gap and Old Navy, as it sounds like you are trying to do? And then for Byron, what is an optimal expense rate? What is the low-hanging fruit and really, how long does it take us to get there? Thanks.

Let me talk about centralization. The keys here for us is that we empower our brands. One of the things that happened when we went to more of a centralized structure as it related to sourcing was that we lost the distinctiveness in the brands, we lost the nimbleness in the brands. Each of our businesses, if you start with Banana Republic, the smallest of the three businesses, at $2.5 billion, there is not that much more of an advantage to scale in terms of our sourcing opportunity. Old Navy, with the size that it is at, the same thing. Centralization is appropriate, however, in certain areas and those are areas that do not, that aren’t related to the distinctive of the brands -- areas like IT and finance. And then there are certain functions like online and CRM where we get incredible power in being centralized.

What I would say, Jeff, as opposed to talking about an optimal expense rate at this point, what I would say is that we have talked quite a bit over the past year about the importance of determining whether incremental investments in store payroll and in marketing could make a difference, and we made those investments. You have also heard that we are going to be dialing those back because we have not got the return we were looking for. The truth of the matter is though as you look back at our cost structure from 2003, our costs have risen across a broad range of categories, and so we are seriously addressing through a complete look at our cost structure, significant and serious opportunities to bring down our costs. So as I related with an earlier question, to get these, to design out these costs so that they do not creep back in, will take time during this year but we do intend to take serious action this year, as indicated by the three initiatives we were prepared to talk about during this call.

The next question is from Lorraine Maikis of Merrill Lynch.

I just wanted to talk a little bit about the Gap remodels. If you could just share with us some of the metrics you have found on the 25 that you did in ’06 in terms of return on capital and sales growth that you generated from these remodels. Thanks.

What we find is that when we do the Gap remodels, we got a modest lift in retail comp. We got a modest life in margin versus our store control group. However, it is absolutely clear that in order to get the returns we are looking for, we have to get the product right in combination with the remodel, and that we did not do. So as we approach the coming year, we will be looking hard at, Marka and the team will be working hard at getting the product more targeted so that when we do the remodels, the stores have been remodeled in a way that best reflect the target customer segment that the team will narrow it down to, and then we will look at the returns of those stores with better product remodeled to determine the ongoing business model economics that are proper for Gap.

The next question is from Dorothy Lakner of CIBC World Markets.

I wanted to ask Marka if she could share with us how much tweaking you think you can do to the fall product and what should we expect for holidays? Is the holiday a line that you will be able to completely effect, or 50% effect? If you could give us some color there. Then, a question I think for Byron. You have given us very detailed guidance for ’07 as a whole. I wonder if you could give us a little bit more color on what we should expect in the first-half of the year, and particularly in the first quarter. Speaking to that, how we should look at the charges for closing Forth & Towne, how that should be divided, if it should be just divided equally between the first quarter and the second quarter.

I will answer first. I think what I am trying to do is make incremental improvements every day on every thing, product being the most important thing. I do not want to make any promises of curtains up on a certain day and you will see a new, reinvented Gap. I think that was something we have done in the past and it does not pay off. The customer has to tell us when we have it right. That being said, we are working on spring development, holiday development, and fall development, or fall placement, all at the same time and doing what we can to make sure we believe it is brand right. That is all I am prepared to say at this point.

With regard to Forth & Towne, as I have said, I have given you the total charges of about $60 million, the vast majority of which would occur over the first and second quarter. It is a little premature to break it apart between quarters, but what we do intend to do later in the year once we have closed the last door and revenue production has stopped at Forth & Towne, it is our intent to reclassify this as a discontinued operation and then we will be able to more specifically describe the costs that in effect should not repeat the following year. In connection with guidance, our practice has been to give full-year guidance. We are not prepared, at least at this point, to depart from that practice, so your updates on the first quarter and the first-half, we will give them with every sales call. That will give you insight as to how we are progressing through the quarter. And then, at the end of the first quarter, we will give you a look back on what occurred, what we think was ongoing expense, and if there are any special call-outs on one-time.

Operator, we have time for two more calls.

The next question is from Marni Shapiro of The Retail Tracker.

Congratulations on the move forward on the product. I am very happy to hear that. Could you talk a little bit about the marketing? You have talked about cutting it back and refocusing it, but are you considering maintaining the levels of marketing where the product is healthy? So maybe kids, baby, body? Have you thought about possibly even increasing it in some of those areas or at Banana Republic?

I will start just by saying that as you know, a lot of our plans are still in the making, so we tend to give you a season at a time with regard to our definitive marketing plans. So with regard to Old Navy, we are of course launching television tonight, so we will be on for five weeks versus six weeks last year. You will see that our presence for spring is largely about the same, so three circulars for spring versus three circulars last year. Then, as Marka alluded to in her remarks, Gap for spring still has quite a bit of marketing. Last year we had no television. This year we actually will be on for four weeks and that will start next week. So the rest of the seasons are really still in the making and we will be describing that more to come.

The final question is from Dana Telsey of Telsey Advisory Group.

I wanted to follow-up on just mark-down rates this year versus last year. How are you looking at the mark-down rates by brand, or for the overall company? Given your abilities to efficiently source, is there any improvement that you can see there on the cost structure side? Lastly, have you adjusted your hurtle rates for new stores and for lease renewals as for what you are expecting? Thank you.

As we look to last year, the much higher degree of promotional and mark-down activity actually caused a decline in both our regular and mark-down margins versus the prior year, so we actually got hit on both. As we work hard to get our inventory levels more closely in line with our actual traffic trends, we would expect in the coming year to sell less at mark-down. With regard to hurtle rates, our hurtle rates remain constant. Our cost of capital has not changed materially and so the hurtle rates remain the same. What is different is our projections. So it is not the model. It is not the business model. It is the assumptions you make about what kind of sales level, growth in margins you could look forward to in the future.

I would like to thank everyone for joining us on the call today. As always, the investor relations team will be available after the call for further questions. Thank you.

Thank you for your participation in today’s call. You may now disconnect.