Good afternoon, ladies and gentlemen. My name is Kristen, and I'll be your conference operator today. I would like to welcome everyone to the Gap Inc. First Quarter 2011 Conference Call. [Operator Instructions] I would now like to introduce your host, Mark Webb, Vice President of Investor Relations. Please go ahead.

Good afternoon, everyone. Welcome to Gap Inc.'s First Quarter 2011 Earnings Conference Call. For those of you participating in the webcast, please turn to Slides 2 and 3. I'd like to remind you that the information made available on this webcast and conference call contains forward-looking statements. For information on factors that could cause our actual results to differ materially from the forward-looking statements, as well as reconciliations of measures we are required to reconcile to GAAP financial measures, please refer to today's press release, as well as our most recent annual report on Form 10-K, both of which are available on gapinc.com. These forward-looking statements are based on information as of May 19, 2011, and we assume no obligation to publicly update or revise our forward-looking statements. Joining us on the call today are Chairman and CEO, Glenn Murphy; and Executive Vice President and CFO, Sabrina Simmons. Now, I'd like to turn the call over to Sabrina.

Thank you, Mark. Good afternoon, everyone. In the face of a challenging quarter, we continue to focus on levers that drive long-term value. On the balance sheet and capital structure plan, we repurchased 25 million shares during the quarter, and we raised $1.65 billion of debt, providing us the flexibility to deliver additional cash to shareholders. On the operating side, we continue to drive forward on our long-term growth initiatives while maintaining expense discipline and delivering operating expenses below the prior year. Please turn to Slide 4 for our earnings recap. In the first quarter, net income was $233 million, down 23%, and EPS was $0.40 per share versus $0.45 last year. Turning to Slide 5. First quarter net sales were down 1% to $3.3 billion, and this includes the impact of the events in Japan. Comparable store sales were down 3%. Online sales grew 18% overall and had a positive impact of 2 points on comp sales in the first quarter. Total sales and comps by division are listed in today's press release. Turning to Slide 6 for margins. First quarter gross margin was down 250 basis points compared to last year's strong first quarter. Rent and occupancy deleveraged only slightly by 10 basis points. Merchandise margins were down 240 basis points, driven by rising cotton prices, which in turn increased our average unit costs. First quarter gross profit of $1.3 billion was down $97 million to last year. Turning to Slide 7 for inventory. At the end of the first quarter, inventory per store was up 9.9%, with the increase in North America several points below that of Gap Inc. This is a bit higher than our expectation we laid out in February with the variance driven by the unit sales miss in Japan, which was worth about…

Thank you, Sabrina, and good afternoon, everybody. I have[ph] a few things I'm going to talk about today before we hand it over for questions. First and foremost, I want to talk about Q1, a lot of events happened inside our business in the first quarter, and I think it's important for me to put some color around that, I then will reference to guidance that you heard Sabrina give for the full year, and then I want to come back to our strategy, and reinforce how strongly we still feel about Gap Inc.'s mid- and long-term strategic plan. So in Q1, as everybody knows, we dealt with the absolute tragedy in Japan. I was in Japan, met with our team in April, spent time with them. Now the Japanese business is, from a consumer perspective, it's going to go through a slowdown well beyond May, June and July. As a matter of fact, the consumer confidence numbers came on Japan are the lowest numbers in 7 years, which you'd expect. So this is not going to change anytime soon. We're planning our business accordingly, knowing that the consumer is not going to show up, traffic is going to be down. To that point, there's 5 stores we plan to open in Japan. In 2011, there were value stores that we will not be opening now in 2011. They're just not going to be ready. But I do want to reinforce that our Old Navy strategy to open stores in the fall of 2012 is still absolutely our intention to do that. The second thing I want to talk about is sales. We were minus 3 comp in the first quarter, which is not good performance. For the last 6 quarters, we have been either flat to positive 4 comp,…

Okay. Operator, that concludes our prepared remarks. I will now open the call to questions, and we'd like to get to as many questions as we can, so we'd appreciate it if everyone could limit their questions to one each.

[Operator Instructions] And your first question comes from the line of Jeff Black with Citigroup.

I guess, Glenn, costs moved from 10 to 20 in pretty lightning speed here, and what was the disconnect? What did you not anticipate? Why is this happening? And when do we see any costs moderating? It just seems to me it's been there in front of us. Either you guys weren't prepared for or you weren't talking about it. Which one was it, I guess?

Jeff, I'll start out on that. At the time of our Q4 call, we had only bought spring and summer and we just started buying fall. We made the assumption at that time that holiday pricing would ease because we were buying fall into what we believe at the time was the peak of cotton. We do most of our holiday buying, and as you guys know, our holiday buys are our biggest buys of the year. We do most of our holiday buying through the months of March, April, May. We're actually not all the way done, and we still have our trends in spring assortments that come into Q4 still to go. But we had made the assumption at the time that our fall buys would be the most expensive, and that we'd get some easing in our holiday buys. And it turns out we were just absolutely wrong on that assumption. Holiday got worse, and that costing came in much higher than we expected and higher than fall.

As we said on the opening comments, the real focus here is in Old Navy and our Outlet business. As you look at in hindsight, for the last 3 years, we've done a lot of work whether it's on the fabric, on trim, on choices for that business. And we've gotten some of our benefit on the operating margins of the business to 2010 by some of the work that all our teams did. Maybe we're a little ahead of the curve as when new management came in in 2007 and then the recession started to show, it's show up at our door, we started to move on a number of different fronts, one was SG&A and one was AUC, which we talked about in all these calls. And we did some good work. Do I still think back then we had the lowest cost? No. Do I still think today there's always opportunities for the business in terms of 2 ways that come in the market through negotiations? For us to get better costing, I mean, that's what we always have to believe when you're dealing as a retailer to a vendor. But at the end of the day, when cotton went above $2 around that February mark and sustained itself for almost 12 full weeks, which was around at the time, as Sabrina said, we were in the midst of negotiations for our holiday product, we didn't have any leverage. And I'm with her, I really thought what we're looking at -- I think we said this in a call in February, we know a lot more about cotton than we did a year ago. We've been talking to everybody. I was out for 12 days out in Asia and our hubs meeting with vendors one-on-one, trying to…

Our next question is from Paul Lejuez with Nomura Securities.

Can you actually kind of differentiate between the cost pressures that's coming from cotton versus wage pressure that might be a little bit more structural? Are you seeing that from your vendors when you get pricing? And then second, just wondering what you could tell us about China? What are they buying in those stores? Do they like the logo product?

Paul, I guess, it's not easy, what we may have said in some past calls is that what I like about our model is -- our buying model that is, is that we can move from country to country. And we've been moving into other countries outside of China now for the better part of the last 18 to 24 months. There is wage pressure, no question about it, and our teams on the ground are keenly aware of that, and we have moved to other markets. Now we're well invested in Vietnam, in Cambodia, in other parts of India, Bangladesh and Sri Lanka. So we are moving business around where appropriate. So there is some wage pressure, there was no question about it. But at the same time, we're assuming, but we don't know when the year plays out, there's also going to be some further, we suspect, demand destruction which maybe will open up some capacity, which would then also have an impact on the wages and the labor line. But I'm not here to predict that today, that's just a theory that could happen with further demand destruction. In our China stores, and I was there in March on the way back from the hub and the sourcing business that I did, still to this day, the percentage of purchases in the Fashion part of our business, and as I was saying earlier, part of the assortment moves that we're making that is a driver of the 20% increase is part of the assortment moves we're making is being driven by our International business. So definitely in China, which is below -- we're a little caught off guard. We really thought that the balance of fashion to basics would be somewhat similar to our U.S. business. But the Fashion business is very strong, which is reassuring for us. We're going to obviously set a good price point when it comes to basics, make sure we have good entry price points complete against who we've identified as our competitors in China fashion -- American fashion product has differentiated us. So what we're encouraged mostly about is when we will get our fashion right because in women's today -- our fashion in Gap, while they're selling successfully in China is not to our standard expectation. That really provides a nice opening for us on marketing perspective and a differentiation. We opened our fifth store 2 weeks ago in the same sort of split of business between fashion and basics, that's a very encouraging sign.

Do you have a lot of logo product in the store, Glenn? I haven't seen the stores. And is that working?

Yes, not soon. I mean, anything with logo on it and obviously, we customize that and localize it, so when I was there recently, Gap Shanghai, Gap Beijing, Gap China, New York of course, San Francisco. We probably do a double-digit percent of our business on logo in some of these markets initially. Our franchise markets, our China markets because that really is what denim and logo bring people in. And then you sell them the fashion because that's where the brand is known for. Even our marketing was not emphasizing that, but in our Franchise business, still our European business today, our Japanese business and China's planning the same way. Logo and denim are very, very popular with consumers.

Your next question is from the line of Edward Yruma with KeyBanc Capital Markets.

I know you'd made a number of very significant personal moves. Glenn, at this point, is your team stable? And can you also give us some insight into what other types of personal moves you've been making, maybe below that kind of below that kind of very most senior level?

Mostly the focus, as I mentioned at the beginning in the commentary was the integration and the merger of our Specialty and Our Value business. That was very important. And so that was a big move because our impact took over Gap North America, then I was followed up by the international changes we made we're. We're trying to simplify our structure internationally and Stephen Sunnucks has taken over International at London. So I'd say from a stabilization perspective, those 2 senior leaders are in place. We put out a fairly large announcement internally just about a month ago, which establishes all of our senior positions in International, in our Gap Global Creative Center in New York, in the team here in North America. So that's all been done. So I'm actually quite pleased with the moves we've made. I think people are hitting the pavement, running as they have to. They're very focused on the Gap business and inside the Gap business, very focused as a top priority in product in Women's. So Mark Breitbard running Merchandise and I feel great about Kevin Komos, that's in North America. Kevin Komos running the International teams, Seth Farbman joining us as our first-ever Chief Marketing Officer for the Global brand. So there's a lot of strategic reasons we've made the changes. We were fortunate to be able to fill most of those internally a couple of positions we went outside to get done. So this was a nice shift to get the International team done, the right call long-term to merge our Specialty and Value business. And no, there's always going to be some onesies and twosies but at the end of the day, I think that the team is very much intact and working well together.

Our next question is from Stacy Pak with Barclays Capital.

I guess I'm curious how much of the hit to 2011 is Japan? That's sort of one thing. And then just on the AUC, what do you think accounts for the difference between Banana and Old Navy? And I guess how much of the sudden 20% increase, which honestly is higher than I've heard anywhere, has to do with how much you guys cut on sourcing in the past and maybe pushed too far and it's sort of payback time?

So Stacy, I'll start with your first question on Japan. So we called out, I think, on the March sales call in April that we thought it'd be about $0.04 to the quarter. It turned out around in that ballpark. We did a little bit of cost cutting in Japan to offset the gross margin hit, but that's the right ballpark. Embedded in our new range is the fact that we don't think that Japan will perform to the level that we would have thought when we have pre-earthquake and tsunami. It is actually recovering nicely, so we're pleased to see that there's some recovery, but we do not believe that the year will perform to the level pre-earthquake/tsunami. And there's a little bit of a range in there, but that is not a big driver to the revision in guidance. The revision in guidance is driven by the AUC. To give you some color on Old Navy versus BR, there is just some old-fashioned map in this. Old Navy's beginning AUC, as you can imagine, is far lower than Banana Republic. So I'm going to make up numbers right now hypothetical. If you take a $1 increase on a beginning average unit cost of $5 versus $1 increase on a beginning average unit cost of $12 to $15, your percentage is going to be much bigger at an Old Navy just because the base is so low. And that is some of what we are definitely experiencing as we have worked through the last 3 years bringing costs down, especially at Old Navy and Outlet, to really low levels. Glenn, did you want to comment?

The one thing I'll add on Old Navy as well is that we have quality standards. I think everybody's business does. And it's our view that while there were still choices available to us that may have allowed us to mitigate against the 20% in the back half, that would just be crossing the line. Right now, the quality standards, we have a lot of meetings with focus groups and other means to identify how our consumers view our quality upfront through either hand-feel, through stretch and recovery, all the different parts that define your quality through fit. And as Tom Wyatt knows, who runs Old Navy, we are at an -- I'd say, an acceptable level today. It's not as probably as strong as Tom Wyatt and Nancy Green would like it, but it's acceptable. So there was no way that some of the choices that either vendors or hub leaders in production presented to us. I saw some of the choices we could have made for fall. Again, holiday is still in motion, so I'm not close enough to see some of the choices, but I know in a lot of cases, they just don't feel comfortable making those trade-offs. So that's really how it played out at the -- from an Old Navy perspective. On the payback commentary, all I can say about that is I don't believe it. I hope not. We did some e-sourcing like a lot of other companies did in 2008, 2009 to find out what the right price was. When we made our statements publicly about our AUC cost opportunity, that was driven by our own personal, internal, how we structure ourselves, how we came to market. The fact that we thought we were not getting recognized for the size of the…

Your next question is from the line of Lorraine Hutchinson with Bank of America Merrill Lynch.

I was a little surprised to see that you expect to end the second quarter with inventory up in the teens. And even x-ing out a couple of points for International, I guess I was just hoping to get the rationale for buying inventory dollars up so high for the North American business.

Yes, I'm glad you raised that, Lorraine. I want to make really clear that North America -- we keep saying North America units are definitely down further than International. So we've been buying North America units down. We're going to continue to buy them down, and of course, facing this AUC, they are coming down further in the back half in North America. The $1 per store that we give at the Inc. level is being impacted, of course, by this very high AUC, but also by our International growth, which you might be surprised how much that impacts us. We are opening, for example, about 20 new stores in the next 3 to 5 months internationally. Some of those are important flagships like Rome. They require quite a bit of inventory buy. So that's definitely impacting us is that International store growth. In addition to that, with the weakening dollar, that inventory that we buy is getting translated at a higher U.S. dollar cost. So again, I want to leave you with the message that North America comp store units, we are definitely buying down. We are trying to balance that because we still have our full year goal of trying to deliver the total company revenue growth. So we're doing the balancing act between not going so severely down so quickly that we have no ammunition to meet that goal, but they are definitely down tightly.

Your next question is from Evren Kopelman with Wells Fargo Securities.

Question on expenses. First on the SG&A expenses, they were down 1%. Is that possible to see down SG&A for the rest of the year, given you have square footage growth internationally? And along the same lines, depreciation was also down 12%. If you can touch on what drove that, that kind of decline in the quarter? And same question for the rest of the year, I think based in your guidance, you don't expect to see such a decline. If you can touch on those, that'd be great.

We're not guiding specifically to SG&A, Evren, but we have demonstrated, I think, quarter-over-quarter or year-over-year, a lot of discipline when it comes to expenses. I think the important thing to point out, as Glenn said in his remarks, we're very committed to our long-term strategies into supporting our brand health. So what we're most proud of is in Q1, we delivered expenses flat as a percent to sales, and below last year even as we invested meaningfully in our growth initiatives internationally and for global online and also while we increased our marketing spend. So that shows you our determination and our discipline on expense. I'm not guiding that, that's going to be so every quarter. There's different dynamics that happen quarter-over-quarter. But I think you can absolutely count on us to continue with that kind of expense discipline. With regard to the depreciation, that also can be bumpy quarter-by-quarter, so we're sticking with our full year guidance. But certainly, we benefit from store closures. We're lapping last year. We had a lot of depreciation write-off because we were doing a lot of remodels for Old Navy in the first half. We don't have that this year. And we have some asset depletion. But that's going to be a little bumpy, but we're going to hold to our full year guidance on that.

Your next question is from the line of Dana Telsey with Telsey Advisory Group.

As you think about the new cost structure for the business, how does it differ by brand? And as price points get adjusted, how do you think about product category basic versus fashion for each brand and what you want the assortment to look like?

Well, look, our economic model is based on the culmination of all of these different parts in our business. So our Online business is obviously one we've always put out there as a very strong return on capital, return on sales, same with our Value business or Outlet business. And even though we're going to go through this period of time, as we highlighted them, given the nature of their business, what I talked earlier about Old Navy, same thing applies to the Outlet business. There's only so many trade-offs they can make given all the ones we have made the last 3 years. But that economic model is still very strong, still something we believe that not only here domestically, but globally. Same with the Old Navy business. What I do and we have tried to do in the last couple of weeks, as we've got ourselves ready for this call and stuff started become clearer to us in the last few weeks about early numbers coming through for holiday and we started looking at. Sabrina and I have sat back often and looked at our business on a pro forma basis. And do we still feel very confident? The answer is yes, in our economic model, in the business, as we look at what is a normalized trend that's going to happen on AUC as we go forward and take out this moment in time. So I think all of those components, there's nothing going on right now in the business what we're talking about today that changes our view of the mix and the businesses we have, the portfolio we have, the multiple brands, the multiple channels. There's nothing on that side. On pricing, that's a great question because obviously, that's one thing that people should be…

Your next question is from the line of Jeff Klinefelter with Piper Jaffray.

Glenn, could you talk a little bit more about your -- maybe on a longer-term view basis, your International growth plans? You're clearly accelerating those openings this year, and it sounds like those stores in both Europe and Asia are trending very well in terms of productivity. You've also talked in the past couple of years about reducing your footprint in the U.S., particularly for Old Navy, where there are less productive stores. Maybe talk about that cycle. And to the extent that you can accelerate that, the expansion of International, the reduction of U.S. in order to drive the overall productivity higher. And I bring it up because internationally, it seems that it's getting more and more competitive every quarter in terms of the real estate. So how are you positioned to take advantage of that?

Jeff, I'd say that we haven't made the decision to push any further on the speed and the pace in which we're going to expand internationally. Now 2012 is a long way off, although plans are being put together and no order of importance. We're very excited with our Franchise business. We're up 43% in the first quarter in our Franchise business. As Mark touched on it, I think, in his opening comments, we were thinking that we do 75 stores. And we're short now, maybe 80 stores, right in the right countries in place, franchisees with the exception of maybe Greece that are going through a real tough time right now. We have not hit any wall that I can tell with any of our franchise markets that our 23 countries today we'll -- as we sit here today, we'll add another 5 or 10 over the next year or so. So that's a very strong business for us. Online International, we're pushing I'd say, pretty aggressively into it. We're in Europe in 22 countries. We're going to be looking at making that site into local languages, which I think is only going to help. And we're getting a great read from our online site in Europe to indicate to us what will be our next country, after Italy, we would consider going into. That's a great way to get that read in our business. So but we're -- Canada online is very strong with more to come on there. Feeling good about Europe and in China. It is basically -- our online site is our #1 store. Sabrina and I've been talking about let's set a target on what actually online should be in China. So yes, it's 10%, 11% here in North America. We got to set…

Your next question is from Michelle Tan with Goldman Sachs.

I was just wondering if you take away the product cost issue, can you give us a sense on what you guys are seeing with respect to markdowns and depth of promotions against last year and how you think about that through the balance of the year?

Yes, I think, Michelle, as we've been saying it on the monthly sales call every month, February and March in particular, we weren't happy with the performance of Women's at Gap and at Banana Republic. We really need to make those Women assortments more appealing. And so our performance in those departments, in those 2 brands, we have been disappointed. We've had to go more at markdown than we wanted do. And our markdown margins are impacted when the assortment and the styling doesn't resonate with the customer. So we have our work cut out for us in those 2 brands. At Old Navy, we actually feel really good about the product assortment across-the-board and in particular in Women's. So when we get her in the box, we've seen throughout the quarter very nice conversion, very nice AUR. What we thought happened at Old Navy was really more of a marketing, as Glenn talked about in his remarks, in our evolution of that marketing campaign, we lost some momentum on the traffic. We've got a lot of that back in April, and we hope to keep that momentum obviously, as we go forward. We've got some lessons learned in February and March. But we're really happy with that product assortment. And of course, the teams at Gap are hard at work with all the changes on the leadership side. And then at Banana, that definitely is the focus of the team at Banana is to get that Women's product back on track.

And on the promotional front, my view is we have every intention to be less promotional. That's our goal. We know what we did in 2008, 2009 was to compete. And I would argue that maybe in the second half of 2010, there was, through better innovation, better creativity, better focus on just the product and not the promotional idea that may have come forward, we probably should have started to move a little bit more in that direction in the latter half of 2010. The teams are committed to that and as Sabrina said, what we would have done a year ago is if we wanted to be promotional to drive traffic, or to move through some inventory, we would have holistically had a 40% off total store. Now I think we go right to where inventory could be, 40% off Women's, excluding denim. That would be an example of what's happening at Gap. Now the goal is we have to -- there's no question, we get the whole issue of what is it our customers want, what kind of frequency, yes, she needs some incentive, thinking out to couch, a little more than usual. That hopefully will weigh in over time. But how do we, through some very creative means, and I think I'm starting to see that at Old Navy in particular, through some of the partnerships they're doing, which I think will really benefit us in this summer and this fall by not actually just go into a traditional way of driving traffic and describing your value proposition by getting much more creative. I mean, everybody on the phone has heard me say this before. And there's times where we've actually delivered on this. And there's time I've been disappointed that we go to the lowest common denominator at times. But the business and all the leaders that I deal with are very committed. We're going to see more of that in the back half of the year, shifting the conversation to less about discount and more about product.

Great, thanks. And then Sabrina, just a quick one, if you could quantify the impact of International on the inventory dollars, that would be really helpful.

We haven't quantified that. I'll tell you the foreign exchange piece by itself is a point. And again, I'll just emphasize that the units in North America are very tight and definitely down much more than, than International.

Your next question is from Janet Kloppenburg with JJK Research.

I heard a whole lot about costs today, but I haven't heard a lot about top line. So I would love you to give us some idea about how you're feeling, the confidence you have in the brands, Glenn, domestically for the rest of the year. And if some of these earnings revision has to do with a less optimistic outlook in terms of your top line performance. And with respect to the costs coming down in the first half of fiscal '12, I'm just wondering, are we just supposed to adjust our models and get back all the margin that we're taking away? Or perhaps you could help us rationally develop a model for next year.

It's probably a little premature. Obviously, coming here today, 3 months after we gave guidance to have to reguide because, as I said earlier, because holiday is just happening in real time. It's still happening now. The last thing that I want to do is try to be predictive on spring and summer right here, right now. As information becomes available and as we get clarity, we will absolutely -- the minute we have clarity, know exactly what spring is going to look like and which would probably be at our next conference call, we'll be able to at least identify whether this 35% drop in cotton, which again futures are around $1.10 and $1.15, but in December, if that trajectory was to continue, you would have a much better sense of what will that mean for our AUC. Sitting here today, I just find it hard to believe that for the fiscal year 2012 -- and this is again, there is no evidence of this, I'm just sitting here today with what I know, if it was to keep coming down at the rate that it's supposed to come down from people who are experts in this field, how could our AUCs not be below through a whole -- through all of our 2012 versus 2011, how could they not be lower? But that -- we're going to give information as we know and as we meet with our teams and as we negotiate. You're absolutely right to bring up top line. We knew today was going to be a lot about -- obviously, the news today was about the reguidance and the reasons behind it. But top line perspective, I'd look at it this way and say that Sabrina's right. The Old Navy business we put a new…

And for Sabrina, I was wondering if we should consider the inventory levels domestically, which I know are down somewhat less than they are on a global basis. But we should consider those in addition to AUC at least for our gross margin estimates in the second and the third quarter. Would that be appropriate?

So we haven't guided to inventory beyond Q2 -- in the Q2 Janet. But with these AUC levels, the way we've described them for the back half, you're definitely going to have inventory higher than cost because we're also basically, we said since actually the fourth quarter earning call, pressure on merchandise margins, pressure on operating margins. It's just that now with the AUCs coming through at much higher levels, that gap is even wider.

But I'm speaking to the question of promotions to bring that inventory down. I think that it's more than just AUC that's driving the inventory, isn't it? You came into the year with more than you expected domestically and you need to get them in line with sales.

We won't have them in line with comps because our margins are not going to be flat or up to LY. They're going to be down to LY. So the inventories will remain above the cost. Now we're taking units down, for sure. We keep reiterating that in North America, especially our comp store units will be down. But the cost is up such that in the AUR, we won't expect to come up as much as would make up that comp that you're going to have margin pressure on the merch margin just like we did in Q1, and that's going to flow through the operating margin line. Now we're bringing the units down, we're trying to balance again to your first question on top line. We want to keep enough units in the system to give us an opportunity to meet our overall goal of driving top line. But the units are down. We're not bringing them down severely. I mean, they're down a lot in North America, but we don't want to go so severe that we have no opportunity to drive top line overall. That's the balance that we're trying to achieve.

Your next question is from the line of Brian Tunick with JPMorgan. Brian Tunick - JP Morgan Chase & Co: Just a quick question, I guess. On the -- it looks like the cash flow, the free cash flow this year, I guess, on your new $1.40 to $1.50, would be, I guess, under $800 million. And I was just wondering, Sabrina, given the bond offering and given your share repurchase program announcement, does this at all change your appetite or pace of share repurchase program?

So we're very committed, as I said in my prepared remarks, Brian, we're very committed to our financial framework. We're very disciplined about distributing cash to shareholders. The debt issuance just gives us more flexibility with regard to how much we achieve. But we have demonstrated over a decade that through many cycles of positive comp, negative comp, global recession, our cash flow is very strong. So it's strong enough that we remain confident and comfortable that we can continue on our path of distributing cash to shareholders.

Your final question will come from the line of Kimberly Greenberger with Morgan Stanley and Company.

I wanted to ask just philosophically about how -- what benchmarks did you use in order to guide your inventory buy? I'm just looking at the last 4 quarters where we had total sales growing faster than total inventory -- I'm sorry, rather total inventory growing faster than total sales. So I understand that there can be a quarter where there's timing differences or an international impact or Japan, et cetera. But to have a persistent growth in inventory above sales, it strikes me that there might be something different today about the way you're managing inventory, and I was just hoping you could step back from the noise of the quarter and help us understand how you're thinking about that going forward?

Yes, that's a great question, Kimberly. So it's in our long-held philosophy that we want to try and keep inventory units in line with demand. There's a lot of noise now with AUC which I'll get too. But our underlying philosophy for many years has been to buy inventory units in line with demand. Last year, the management team broadly speaking at Gap Inc. held hands to make the decision to air on the side of the customer and buy units to make sure that we were in stock in our stores. So last year, we began to depart a little bit from buying the units in line with our traffic. We were not happy with the results. And we've talked about that, and we definitely also decided, given the results of that, that we would go back to our practice of bringing the units down. Just at the time we brought the units back down, we're getting safe with this very high average unit costs. So that is frustrating because we're not reporting the dollars as far as the units are down, but the units, again, I will say, are definitely down. We're getting back to our principle of getting back down in line with traffic for certain. We realized the cost is up much where in many cases bringing them down below traffic to account for the fact that average unit costs are up so much. I feel like they're in reasonable shape in North America. We've actually bought them quite conservatively, especially at our largest brand, Old Navy. The other dynamic that's happening that's masking that discipline is this commitment to International growth, and that the pressure that is putting on a per-store basis as we try and open these stores internationally in our back half, some of which are flagships and bringing inventory in. So I -- we will consider going forward, whether we just get more transparent about telling you about our units in North America down because it obviously is an important point to make, and it might be helpful in future as we consider actually just being more clear about how far those units are down because I think you guys would gain comfort from that.

Okay, we'd like to thank everybody for joining us on the call today. As a reminder, the earnings press release is available on www.gapinc.com and it contains a full recap of our Q1 results, as well as the forward-looking guidance included in Sabrina's remarks. And as always, the IR team will be around after the call to take questions. Thanks.