"We're proud to deliver second quarter earnings per share above last year, especially during a challenging environment," said Glenn Murphy, chairman and chief executive officer of Gap Inc. "Building upon two years of work improving our economic model, we're now putting further emphasis on changing the trajectory of our top line performance. Our focus is to find the right balance between maintaining our cost discipline and making appropriate, targeted investments to gain back market share."

Financial Performance Highlights

Second quarter diluted earnings per share increased to $0.33 from $0.32 last year.

Second quarter gross margin increased by 150 basis points driven by improved merchandise margins.

Operating expenses in the second quarter of fiscal year 2009 were down about $50 million compared with the second quarter last year. Since the beginning of fiscal year 2007, operating expenses are down about $650 million.

Year to date, free cash flow was an inflow of $589 million, leaving the company with more than $2 billion in cash and cash equivalents.

Sales Results

Second quarter net sales were $3.25 billion, compared with $3.50 billion for the second quarter of last year. The company's second quarter comparable store sales decreased 8 percent, compared with a decrease of 10 percent for the second quarter of last year. The company's online sales for the second quarter of 2009, which includes Athleta, increased 17 percent to $224 million, compared with $191 million for the second quarter of last year.

The following table represents the company's second quarter comparable store sales and net sales by division:

                                  Second Quarter Comparable Store Sales   Second QuarterNet Sales                                         2009      2008                          2009            2008            Gap North America               -10   %   -6    %                       $878 million    $999 million    Banana Republic North America   -15   %   -6    %                       $516 million    $599 million    Old Navy North America          -4    %   -16   %                       $1.24 billion   $1.30 billion   International*                  -5    %   -6    %                       $361 million    $376 million    Gap Inc. Direct                 n/a       n/a                           $224 million    $191 million     -------------------------------------------------------------------------------  

*Excludes wholesale business and franchise business

Additional Results and 2009 Outlook

Margins

Gross margin of 39.7 percent increased 150 basis points for the second quarter compared with the prior year.

Operating margin was 11.6 percent for the second quarter compared with 10.7 percent for the prior year.

Operating Expenses

Operating expenses were down $52 million in the second quarter of fiscal year 2009 compared with the prior year. The company expects operating expenses in the third quarter of fiscal year 2009 to be flat to up about $20 million compared with the third quarter of last year, primarily driven by the expected increase in marketing expense of about $25 million in the third quarter of fiscal year 2009 compared with the third quarter of last year.

Effective Tax Rate

The effective tax rate was 39.4 percent for the second quarter of fiscal year 2009. The company continues to expect that the effective tax rate will be about 39 percent for fiscal year 2009.

Share Repurchases

The company announced that it will likely resume share repurchases in the third quarter of fiscal year 2009.

Cash and Cash Equivalents and Short-term Investments

The company ended the second quarter with $2.1 billion in cash and cash equivalents and short-term investments. Year to date, free cash flow, defined as net cash provided by operating activities less purchases of property and equipment, was an inflow of $589 million. Please see the reconciliation of free cash flow, a non-GAAP financial measure, from the GAAP financial measure in the tables at the end of this release.

Inventory

On a year-over-year basis, the company reported that inventory per square foot was down 14 percent at the end of the second quarter. At the end of the third quarter of fiscal year 2009, the company expects inventory per square foot to be down in the high-single digits compared with the third quarter of fiscal year 2008. Please see the Financials section under the Investors tab on www.gapinc.com for the company's explanation of numerical range guidance.

Depreciation and Amortization

The company continues to expect depreciation and amortization expense, net of amortization of lease incentives, for fiscal year 2009 to be about $550 million.

Capital Expenditures

Year to date, capital expenditures were $131 million. The company continues to expect capital spending of about $350 million for fiscal year 2009.

Real Estate

During the second quarter of fiscal year 2009, the company opened 12 store locations and closed 16 store locations.This compares with 22 openings and 29 closings for the second quarter of the prior year.

The company ended the second quarter of fiscal year 2009 with 3,145 store locations, and net square footage decreased 0.3 percent from the end of fiscal year 2008.

Year to date, the company has opened 23 store locations and closed 27 store locations.

The company continues to expect that it will open about 50 stores and close about 100 stores for fiscal year 2009, including repositions. The company continues to expect that net square footage will decrease about 2 percent in fiscal year 2009 over last year.

The following table contains our second quarter store openings, store closings, and square footage for wholly owned stores:

                                  Quarter Ended August 1, 2009                                                                                                                               StoreLocationsBeginningof Q2   StoreLocationsOpened   StoreLocationsClosed   StoreLocationsEnd of Q2   Sq. Ft.(millions)   Gap North America               1,188                          1                      10                     1,179                     11.7                Gap Europe                      175                            4                      -                      179                       1.5                 Gap Asia                        115                            1                      -                      116                       1.1                 Old Navy North America          1,066                          1                      5                      1,062                     20.0                Banana Republic North America   575                            5                      1                      579                       4.9                 Banana Republic Asia            27                             -                      -                      27                        0.2                 Banana Republic Europe          3                              -                      -                      3                         -                   Total                           3,149                          12                     16                     3,145                     39.4                 -------------------------------------------------------------------------------  

Webcast and Conference Call Information

Evan Price, vice president, Investor Relations, will host a summary of Gap Inc.'s second quarter fiscal year 2009 results in a live conference call and real-time webcast at approximately 5 p.m. Eastern time today. Mr. Price will be joined by Glenn Murphy, Gap Inc. chairman and chief executive officer, and Sabrina Simmons, Gap Inc. executive vice president and chief financial officer.

To access the conference call, please dial (800) 374-0168, or (706) 634-0994 for international callers. The webcast is located on the Conference Calls & Webcasts page in the Financials section under the Investors tab on www.gapinc.com. Replay of this event will be made available on (800) GAP-NEWS for four weeks after this announcement and archived on www.gapinc.com.

Gap Inc. Dresses NYSE in Denim and Rings The Closing Bell®

On Friday, August 21, 2009, the company celebrates its 40th anniversary and for the first time in New York Stock Exchange history, the NYSE trading floor community will wear jeans to work. Gap brand will outfit the Exchange trading floor for this one-time-only event in its 1969 Premium Jeans, a new collection named in honor of Gap's debut year. Later that day, executives from the company will ring The Closing Bell® remotely from the company's headquarters in San Francisco.

August Sales

The company will report August sales on September 3, 2009.

Forward-Looking Statements

This press release and related conference call and webcast contain unaudited financial information for the second quarter of 2009 and forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements other than those that are purely historical are forward-looking statements. Words such as "expect," "anticipate," "believe," "estimate," "intend," "plan," "project," and similar expressions also identify forward-looking statements. Forward-looking statements include statements regarding: (i) maintaining cost discipline and making targeted investments; (ii) gaining back market share; (iii) operating expenses for the third quarter of fiscal year 2009; (iv) marketing expenses for the third quarter of fiscal year 2009; (v) effective tax rate for fiscal year 2009; (vi) share repurchases in the third quarter of fiscal year 2009; (vii) year-over-year change in inventory per square foot at the end of the third quarter of fiscal year 2009; (viii) depreciation and amortization for fiscal year 2009; (ix) capital expenditures for fiscal year 2009; (x) store openings and closings for fiscal year 2009; (xi) real estate square footage for fiscal year 2009; (xii) driving traffic; (xiii) improving comp store sales trends; (xiv) delivering healthy merchandise margins; (xv) maintaining cost discipline; (xvi) generating free cash flow; (xvii) focusing on return on invested capital, and (xviii) Old Navy store remodels.

Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause the company's actual results to differ materially from those in the forward-looking statements.