This summary is based on the third quarter fiscal 2007 earnings call conducted by Gap Inc. (GPS: chart) on November 21, 2007.

Chairman and CEO: Glenn Murphy
EVP of Finance and acting CFO: Sabrina Simmons
VP of Investor Relations: Evan Price

Key Investors Issues

- The earnings per share rose to 30 cents from 23 cents in prior year.
- Quarterly revenue was flat at $3.9 billion.
- During the third quarter, the company repurchased 48 million shares and paid a dividend of 8 cents per share.

Third Quarter Fiscal 2007 Financial Highlights

Gap reported that its net earnings increased 26% to $238 million, or 30 cents per share on a diluted basis, compared with $189 million, or 23 cents per share on a diluted basis, for the third quarter of last year.

Third quarter net sales were $3.9 billion, which is flat compared with the third quarter of last year.

Due to the 53rd week in fiscal year 2006, third quarter 2007 comparable store sales are compared with the thirteen weeks ended November 4, 2006. On this basis, comparable store sales decreased 5% compared with a decrease of 5% for the third quarter of 2006. The company’s online sales for the third quarter increased 36% to $247 million, compared with $182 million for the third quarter of last year.

Gross margin of 37.5% increased 0.1 point in the third quarter of fiscal year 2007 compared with the prior year.

Third quarter gross profit was flat to last year''s $1.4 billion. Merchandise margins improved 100 basis points, which was partially offset by 90 basis points of occupancy deleveraging. Operating margin for the third quarter was 9.5 percent, which is 2.2 points higher than last year.

The operating expenses were $1.1 billion, down $82 million from last year.

This was driven by a reduction in marketing expenses of about $75 million. Substantially all of the second half savings anticipated in marketing were realized in the third quarter. Marketing expenses for the quarter were $124 million versus $199 million last year. This decrease was primarily driven by reductions at Gap and Old Navy.

The effective tax rate was 39.5% for the third quarter of 2007.

The company continues to expect the effective tax rate to be about 39% for full year 2007.

The company ended the third quarter with $1.7 billion in cash and investments, and $188 million in long-term debt.

For the first three quarters of fiscal year 2007, free cash flow was an inflow of $484 million, compared with an inflow of $214 million last year. This increase was primarily driven by lower inventory levels and a change in vendor payment terms. The company now expects to generate about $900 million in free cash flow for fiscal year 2007, driven by its upward revision in earnings, continued disciplined inventory management and change in vendor payment terms.

During the third quarter, the company repurchased 48 million shares.

The company has utilized $887 million of the $1.5 billion share repurchase program that was announced on August 23, 2007. Eight million of the total 48 million shares were repurchased from individual members of the Fisher family as part of the previously announced purchase agreements with them. The company paid a dividend of 8 cents per share in the third quarter.

The inventory per square foot was down 8% at the end of the third quarter on a year-over-year basis as compared with flat inventory last year.

The firm ended the third quarter with $2.5 billion in inventory, down 5% over the third quarter of 2006. As the firm enters holiday, it is comfortable with our inventory levels at each of its brand. The company continues to expect the percent change in inventory per square foot on a year-over-year basis to be down in the mid-single digits at the end of the fourth quarter of fiscal year 2007.

- Year-to-date capital expenditures were $519 million.