GAP INC (Form: 10-Q, Received: 12/07/2011 16:10:05)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 29, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-7562

THE GAP, INC.

(Exact name of registrant as specified in its charter)


Delaware		94-1697231
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Two Folsom Street, San Francisco, California		94105
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: (415) 427-0100

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No þ

The number of shares of the registrant’s common stock outstanding as of November 29, 2011 was 488,305,236.

THE GAP, INC.

TABLE OF CONTENTS


		Page
	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements		3

	Condensed Consolidated Balance Sheets as of October 29, 2011, January 29, 2011, and October 30, 2010		3

	Condensed Consolidated Statements of Income for the Thirteen and Thirty-Nine Weeks Ended October 29, 2011 and October 30, 2010		4

	Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended October 29, 2011 and October 30, 2010		5

	Notes to Condensed Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		28

Item 4.	Controls and Procedures		29

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings		29

Item 1A.	Risk Factors		29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		29

Item 6.	Exhibits		30

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements.

THE GAP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


($ and shares in millions except par value)	October 29, 2011			January 29, 2011			October 30, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	1,392		$	1,561		$	1,403
Short-term investments		25			100			251
Merchandise inventory		2,322			1,620			2,160
Other current assets		815			645			663

Total current assets		4,554			3,926			4,477
Property and equipment, net of accumulated depreciation of $5,202, $5,010, and $5,021 for periods presented, respectively		2,550			2,563			2,587
Other long-term assets		553			576			664

Total assets	$	7,657		$	7,065		$	7,728

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of debt	$	52		$	3		$	3
Accounts payable		1,472			1,049			1,438
Accrued expenses and other current liabilities		957			993			960
Income taxes payable		1			50			11

Total current liabilities		2,482			2,095			2,412

Long-term liabilities:
Long-term debt		1,606			—			—
Lease incentives and other long-term liabilities		910			890			972

Total long-term liabilities		2,516			890			972

Commitments and contingencies (see Note 12)
Stockholders’ equity:
Common stock $0.05 par value
Authorized 2,300 shares; Issued 1,106 shares for all periods presented; Outstanding 489, 588, and 616 shares for periods presented, respectively		55			55			55
Additional paid-in capital		2,873			2,939			2,939
Retained earnings		12,201			11,767			11,462
Accumulated other comprehensive income		226			185			183
Treasury stock at cost (617, 518, and 490 shares for periods presented, respectively)		(12,696	)		(10,866	)		(10,295	)

Total stockholders’ equity		2,659			4,080			4,344

Total liabilities and stockholders’ equity	$	7,657		$	7,065		$	7,728

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	13 Weeks Ended						39 Weeks Ended
($ and shares in millions except per share amounts)	October 29, 2011			October 30, 2010			October 29, 2011			October 30, 2010
Net sales	$	3,585		$	3,654		$	10,266		$	10,300
Cost of goods sold and occupancy expenses		2,271			2,149			6,397			6,080

Gross profit		1,314			1,505			3,869			4,220
Operating expenses		968			1,001			2,803			2,845

Operating income		346			504			1,066			1,375
Interest expense (reversal)		22			3			50			(6	)
Interest income		(1	)		(1	)		(3	)		(4	)

Income before income taxes		325			502			1,019			1,385
Income taxes		132			199			404			546

Net income	$	193		$	303		$	615		$	839


Weighted-average number of shares - basic		503			622			542			646
Weighted-average number of shares - diluted		505			626			547			651

Earnings per share - basic	$	0.38		$	0.49		$	1.13		$	1.30
Earnings per share - diluted	$	0.38		$	0.48		$	1.12		$	1.29

Cash dividends declared and paid per share	$	0.1125		$	0.10		$	0.3375		$	0.30

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	39 Weeks Ended
($ in millions)	October 29, 2011			October 30, 2010
Cash flows from operating activities:
Net income	$	615		$	839
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		444			492
Amortization of lease incentives		(62	)		(63	)
Share-based compensation		50			61
Tax benefit from exercise of stock options and vesting of stock units		10			8
Excess tax benefit from exercise of stock options and vesting of stock units		(11	)		(9	)
Non-cash and other items		51			36
Deferred income taxes		82			(2	)
Changes in operating assets and liabilities:
Merchandise inventory		(694	)		(666	)
Other current assets and other long-term assets		(78	)		(31	)
Accounts payable		422			383
Accrued expenses and other current liabilities		(87	)		(178	)
Income taxes payable, net of prepaid and other tax-related items		(185	)		17
Lease incentives and other long-term liabilities		81			49

Net cash provided by operating activities		638			936


Cash flows from investing activities:
Purchases of property and equipment		(416	)		(413	)
Purchases of short-term investments		(50	)		(450	)
Maturities of short-term investments		125			425
Change in other assets		(4	)		3

Net cash used for investing activities		(345	)		(435	)


Cash flows from financing activities:
Proceeds from issuance of short-term debt		9			3
Proceeds from issuance of long-term debt		1,646			—
Payments of long-term debt issuance costs		(11	)		—
Proceeds from share-based compensation, net of withholding tax payments		55			62
Repurchases of common stock		(2,013	)		(1,352	)
Excess tax benefit from exercise of stock options and vesting of stock units		11			9
Cash dividends paid		(181	)		(192	)

Net cash used for financing activities		(484	)		(1,470	)

Effect of foreign exchange rate fluctuations on cash		22			24

Net decrease in cash and cash equivalents		(169	)		(945	)
Cash and cash equivalents at beginning of period		1,561			2,348

Cash and cash equivalents at end of period	$	1,392		$	1,403


Non-cash investing activities:
Purchases of property and equipment not yet paid at end of period	$	50		$	54

Supplemental disclosure of cash flow information:
Cash paid for interest during the period	$	42		$	1
Cash paid for income taxes during the period	$	494		$	526

See Accompanying Notes to Condensed Consolidated Financial Statements

THE GAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The Condensed Consolidated Balance Sheets as of October 29, 2011 and October 30, 2010, the Condensed Consolidated Statements of Income for the thirteen and thirty-nine weeks ended October 29, 2011 and October 30, 2010, and the Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 29, 2011 and October 30, 2010 have been prepared by The Gap, Inc. (the “Company,” “we,” and “our”), without audit. In the opinion of management, such statements include all adjustments (which include only normal recurring adjustments) considered necessary to present fairly our financial position, results of operations, and cash flows as of October 29, 2011 and October 30, 2010 and for all periods presented. The Condensed Consolidated Balance Sheet as of January 29, 2011 has been derived from our audited financial statements.

We identify our operating segments based on the way we manage and evaluate our business activities. We have two reportable segments: Stores and Direct.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted from these interim financial statements. We suggest that you read these Condensed Consolidated Financial Statements in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011.

The results of operations for the thirteen and thirty-nine weeks ended October 29, 2011 are not necessarily indicative of the operating results that may be expected for the fifty-two-week period ending January 28, 2012.

Note 2. Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update to revise the manner in which entities present comprehensive income in their financial statements. This guidance requires entities to present each component of net income along with total net income, each component of other comprehensive income (“OCI”) along with a total for OCI, and a total amount for comprehensive income, either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This accounting standards update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We will adopt the provisions of this accounting standards update in the first quarter of fiscal 2012.

In September 2011, the FASB issued an accounting standards update to simplify how entities test goodwill for impairment. This guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This accounting standards update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We expect to adopt the provisions of this accounting standards update in the fourth quarter of fiscal 2011 and do not expect the adoption to have a material impact on our consolidated financial statements.

Note 3. Goodwill and Intangible Assets

Goodwill and intangible assets consist of the following and are included in other long-term assets:


($ in millions)	October 29, 2011			January 29, 2011			October 30, 2010
Goodwill	$	99		$	99		$	99

Trade name	$	54		$	54		$	54

Intangible assets subject to amortization	$	15		$	15		$	15
Less: Accumulated amortization		(14	)		(12	)		(11	)

Intangible assets subject to amortization, net	$	1		$	3		$	4

All of the goodwill and intangible assets above have been allocated to the Direct reportable segment.

During the thirteen and thirty-nine weeks ended October 29, 2011 and October 30, 2010, there were no changes in the carrying amount of goodwill or the trade name. Intangible assets subject to amortization, consisting primarily of customer relationships, are amortized over a weighted-average amortization period of four years. There was no material amortization expense for intangible assets subject to amortization for the thirteen weeks ended October 29, 2011. Amortization expense for intangible assets subject to amortization was $1 million for the thirteen weeks ended October 30, 2010 and $2 million and $3 million for the thirty-nine weeks ended October 29, 2011 and October 30, 2010, respectively, and is recorded in operating expenses in the Condensed Consolidated Statements of Income.

Note 4. Debt and Credit Facilities

In April 2011, we issued $1.25 billion aggregate principal amount of 5.95 percent notes (the “Notes”) due April 2021 and received proceeds of $1.24 billion in cash, net of underwriting and other fees of $11 million. The net proceeds are available for general corporate purposes, including repurchases of our common stock. Interest is payable semi-annually on April 12 and October 12 of each year and commenced on October 12, 2011. We have an option to call the Notes in whole or in part at any time, subject to a make whole premium. The Notes agreement is unsecured and does not contain any financial covenants. The amount recorded in long-term debt in the Condensed Consolidated Balance Sheet for the Notes is equal to the aggregate principal amount of the Notes, net of the unamortized discount. The estimated fair value of the Notes was $1.18 billion as of October 29, 2011 and was based on the quoted market price of the Notes as of the last business day of the thirteen-week period ended October 29, 2011.

In April 2011, we also entered into a $400 million, five-year, unsecured term loan due April 2016, which was funded in May 2011. Repayments of $40 million are payable on April 7 of each year, commencing on April 7, 2012, with a final repayment of $240 million due on April 7, 2016. In addition, interest is payable at least quarterly based on an interest rate equal to the London Interbank Offered Rate (“LIBOR”) plus a margin based on our long-term senior unsecured credit ratings. The term loan agreement contains financial and other covenants including, but not limited to, limitations on liens and subsidiary debt as well as the maintenance of two financial ratios – a fixed charge coverage ratio and a leverage ratio. Violation of these covenants could result in a default under the term loan agreement, which would require the immediate repayment of outstanding amounts. The estimated fair value of the term loan was $400 million as of October 29, 2011. The carrying value of the term loan approximates its fair value, as the interest rate varies depending on quoted market rates and our credit rating.

Long-term debt as of October 29, 2011 consists of the following:


($ in millions)
Notes	$	1,246
Term loan		400

Total long-term debt		1,646
Less: Current portion		(40	)

Total long-term debt, less current portion	$	1,606

In April 2011, we replaced our existing $500 million, five-year, unsecured revolving credit facility, which was scheduled to expire in August 2012, with a new $500 million, five-year, unsecured revolving credit facility (the “Facility”), which is scheduled to expire in April 2016. The Facility is available for general corporate purposes including working capital, trade letters of credit, and standby letters of credit. It contains financial and other covenants, including but not limited to limitations on liens and subsidiary debt, as well as the maintenance of two financial ratios—a fixed charge coverage ratio and a leverage ratio. Violation of these covenants could result in a default under the Facility, which would permit the participating banks to terminate our ability to access the Facility for letters of credit and advances and require the immediate repayment of any outstanding advances under the Facility. The facility usage fees and fees related to the Facility fluctuate based on our long-term senior unsecured credit ratings and our leverage ratio. If we were to draw on the Facility, interest would be a base rate (typically LIBOR) plus a margin based on our long-term senior unsecured credit ratings and our leverage ratio on the unpaid principal amount. To maintain availability of funds under the Facility, we pay a facility fee on the full facility amount, regardless of usage. As of October 29, 2011, there were no borrowings under the Facility. The net availability of the Facility, reflecting $43 million of outstanding standby letters of credit, was $457 million as of October 29, 2011.

In conjunction with our financings, we obtained new long-term senior unsecured credit ratings from Moody’s Investors Service (“Moody’s”) and Fitch Ratings (“Fitch”). Moody’s assigned a rating of Baa3, and Fitch assigned a rating of BBB-. Standard & Poor’s Rating Service (“Standard & Poor’s”) continued to rate us BB+. As of October 29, 2011, there were no changes in these credit ratings. Any future reduction in the Moody’s or Standard & Poor’s ratings would increase the interest expense related to our $400 million term loan and any future interest expense if we were to draw on the Facility.

In September 2010, we entered into two separate agreements to make unsecured revolving credit facilities available for our operations in China (the “China Facilities”). The China Facilities are uncommitted and are available for borrowings, overdraft borrowings, and issuances of bank guarantees. The 196 million Chinese yuan (approximately $30 million as of October 29, 2011) China Facilities were set to expire in August 2011 but were renewed under substantially similar terms through September 2012. As of October 29, 2011, there were borrowings of $12 million (78 million Chinese yuan) at an interest rate of 6.53 percent under the China Facilities, which are recorded in current maturities of debt in the Condensed Consolidated Balance Sheet. The net availability of the China Facilities, reflecting these borrowings, was approximately $18 million as of October 29, 2011.

Current maturities of debt in the Condensed Consolidated Balance Sheets as of January 29, 2011 and October 30, 2010 also include $3 million and $3 million, respectively, of borrowings under the China Facilities.

Note 5. Fair Value Measurements

Effective January 30, 2011, we adopted enhanced disclosure requirements for fair value measurements. There were no purchases, sales, issuances, or settlements related to recurring level 3 measurements during the thirteen and thirty-nine weeks ended October 29, 2011.

There were no transfers into or out of level 1 and level 2 during the thirteen and thirty-nine weeks ended October 29, 2011 and October 30, 2010.

Financial Assets and Liabilities

Financial assets and liabilities measured at fair value on a recurring basis and cash equivalents and short-term investments held at amortized cost are as follows:


			Fair Value Measurements at Reporting Date Using
($ in millions)	October 29, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	477	$	—	$	477	$	—
Short-term investments		25		—		25		—
Derivative financial instruments		7		—		7		—
Deferred compensation plan assets		23		23		—		—

Total	$	532	$	23	$	509	$	—

Liabilities:
Derivative financial instruments	$	37	$	—	$	37	$	—


			Fair Value Measurements at Reporting Date Using
($ in millions)	January29, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	604	$	—	$	604	$	—
Short-term investments		100		—		100		—
Derivative financial instruments		4		—		4		—
Deferred compensation plan assets		27		27		—		—

Total	$	735	$	27	$	708	$	—

Liabilities:
Derivative financial instruments	$	37	$	—	$	37	$	—


			Fair Value Measurements at Reporting Date Using
($ in millions)	October 30, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash equivalents	$	459	$	—	$	459	$	—
Short-term investments		251		—		251		—
Derivative financial instruments		4		—		4		—
Deferred compensation plan assets		26		26		—		—

Total	$	740	$	26	$	714	$	—

Liabilities:
Derivative financial instruments	$	56	$	—	$	56	$	—

We have highly liquid investments classified as cash equivalents and short-term investments, which are placed primarily in time deposits and domestic commercial paper. These investments are classified as held-to-maturity based on our positive intent and ability to hold the securities to maturity. We value these investments at their original purchase prices plus interest that has accrued at the stated rate. The October 30, 2010 fair value table has been updated to include cash equivalents and short-term investments in level 2.

Derivative financial instruments primarily include foreign exchange forward contracts. The principal currencies hedged against changes in the U.S. dollar are British pounds, Japanese yen, and Canadian dollars. The fair value of the Company’s derivative financial instruments is determined using pricing models based on current market rates. Derivative financial instruments in an asset position are recorded in other current assets or other long-term assets in the Condensed Consolidated Balance Sheets. Derivative financial instruments in a liability position are recorded in accrued expenses and other current liabilities or lease incentives and other long-term liabilities in the Condensed Consolidated Balance Sheets.

We maintain a deferred compensation plan that allows eligible employees to defer compensation up to a maximum amount. Plan investments are recorded at market value and are designated for the deferred compensation plan. The fair value of the Company’s deferred compensation plan assets is determined based on quoted market prices, and the assets are recorded in other long-term assets in the Condensed Consolidated Balance Sheets.

Nonfinancial Assets

We review the carrying value of long-lived assets, including lease rights, key money, and intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Long-lived assets are considered impaired if the estimated undiscounted future cash flows of the asset or asset group are less than the carrying value. For impaired assets, we recognize a loss equal to the difference between the carrying value of the asset or asset group and its estimated fair value. The estimated fair value of the asset or asset group is based on estimated discounted future cash flows of the asset or asset group using a discount rate commensurate with the risk. The asset group is defined as the lowest level for which identifiable cash flows are available.

We review the carrying value of goodwill and the trade name for impairment annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The impairment review of goodwill involves comparing the fair value of a reporting unit to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, a second step is required to measure the goodwill impairment loss. The second step includes hypothetically valuing all the tangible and intangible assets of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit’s goodwill is compared to the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying amount. A reporting unit is an operating segment or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management. We have deemed our reporting unit of goodwill to be our Direct operating segment, which is the level at which segment management regularly reviews operating results and makes resource allocation decisions. The fair value of the reporting unit used to test goodwill for impairment is estimated using the income approach.

The trade name is considered impaired if the estimated fair value of the trade name is less than the carrying value. If the trade name is considered impaired, we recognize a loss equal to the difference between the carrying value and the estimated fair value of the trade name. The fair value of the trade name is determined using the relief from royalty method.

There were no material impairment charges recorded for goodwill, the trade name, or other long-lived assets for the thirteen and thirty-nine weeks ended October 29, 2011 and October 30, 2010.

Note 6. Derivative Financial Instruments

We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. Our risk management policy is to hedge a significant portion of forecasted merchandise purchases for foreign operations, forecasted intercompany royalty payments, and intercompany obligations that bear foreign exchange risk using foreign exchange forward contracts. The principal currencies hedged against changes in the U.S. dollar are British pounds, Japanese yen, and Canadian dollars. We do not enter into derivative financial contracts for trading purposes. Cash flows from derivative financial instruments are classified as cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows.

Cash Flow Hedges

We designate the following foreign exchange forward contracts as cash flow hedges: (1) forward contracts used to hedge forecasted merchandise purchases denominated primarily in U.S. dollars made by our international subsidiaries whose functional currencies are their local currencies; and (2) forward contracts used to hedge forecasted intercompany royalty payments denominated in Japanese yen and Canadian dollars received by entities whose functional currencies are U.S. dollars. We enter into foreign exchange forward contracts to hedge forecasted merchandise purchases and related costs generally occurring in 12 to 18 months. We make intercompany royalty payments on a quarterly basis, and we enter into foreign exchange forward contracts to hedge intercompany royalty payments generally occurring in 9 to 15 months.

During the thirteen weeks ended April 30, 2011, we entered into and settled treasury rate lock agreements in anticipation of issuing our 5.95 percent fixed-rate Notes of $1.25 billion in April 2011. Prior to the issuance of our Notes, we were subject to changes in interest rates, and we therefore locked into fixed-rate coupons to hedge against the interest rate fluctuations. The gain related to the treasury lock agreements is reported as a component of OCI and is recognized in income over the life of the Notes.

There were no material amounts recorded in the Condensed Consolidated Statements of Income for the thirteen and thirty-nine weeks ended October 29, 2011 or October 30, 2010 as a result of hedge ineffectiveness, hedge components excluded from the assessment of effectiveness, or the discontinuance of cash flow hedges because the forecasted transactions were no longer probable.

Net Investment Hedges

We also use foreign exchange forward contracts to hedge the net assets of international subsidiaries to offset the foreign currency translation and economic exposures related to our investment in the subsidiaries.

There were no amounts recorded in the Condensed Consolidated Statements of Income for the thirteen and thirty-nine weeks ended October 29, 2011 or October 30, 2010 as a result of hedge ineffectiveness, hedge components excluded from the assessment of effectiveness, or the discontinuance of net investment hedges.

Not Designated as Hedging Instruments

In addition, we use foreign exchange forward contracts to hedge our market risk exposure associated with foreign currency exchange rate fluctuations for certain intercompany balances denominated in currencies other than the functional currency of the entity with the intercompany balance. The gain or loss on the derivative financial instruments, as well as the remeasurement of the underlying intercompany balances, is recorded in operating expenses in the Condensed Consolidated Statements of Income in the same period and generally offset.

We generally enter into foreign exchange forward contracts as needed to hedge intercompany balances that bear foreign exchange risk. These foreign exchange forward contracts generally settle in less than 12 months.

Outstanding Notional Amounts

As of October 29, 2011, January 29, 2011, and October 30, 2010, we had foreign exchange forward contracts outstanding to sell various currencies related to our forecasted merchandise purchases and forecasted intercompany royalty payments and to buy the following notional amounts:


(notional amounts in millions)	October 29, 2011		January 29, 2011		October 30, 2010
U.S. dollars (1)	$	995	$	1,025	$	1,053
British pounds	£	40	£	54	£	49

(1)	The principal currencies hedged against changes in the U.S. dollar were British pounds, Japanese yen, and Canadian dollars.

As of October 29, 2011, January 29, 2011, and October 30, 2010, we had foreign exchange forward contracts outstanding to hedge the net assets of our Japanese subsidiary in the following notional amounts:


(notional amounts in millions)	October 29, 2011		January 29, 2011		October 30, 2010
Japanese yen	¥	3,000	¥	3,000	¥	—

As of October 29, 2011, January 29, 2011, and October 30, 2010, we had foreign exchange forward contracts outstanding to buy the following currencies related to our intercompany balances that bear foreign exchange risk:


(notional amounts in millions)	October 29, 2011		January 29, 2011		October 30, 2010
U.S. dollars	$	47	$	12	$	20
British pounds	£	1	£	—	£	—
Japanese yen	¥	3,238	¥	3,238	¥	3,238

Contingent Features

We had no derivative financial instruments with credit-risk-related contingent features underlying the agreements as of October 29, 2011, January 29, 2011, or October 30, 2010.

Quantitative Disclosures about Derivative Financial Instruments

The fair values of asset and liability derivative financial instruments are as follows:


	October 29, 2011
	Asset Derivatives			Liability Derivatives
($ in millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as cash flow hedges:
Foreign exchange forward contracts	Other current assets	$	3	Accrued expenses and other current liabilities	$	24
Foreign exchange forward contracts	Other long-term assets		1	Lease incentives and other long-term liabilities		4

Total derivatives designated as cash flow hedges			4			28

Derivatives designated as net investment hedges:
Foreign exchange forward contracts	Other current assets		1	Accrued expenses and other current liabilities		2
Foreign exchange forward contracts	Other long-term assets		—	Lease incentives and other long-term liabilities		—

Total derivatives designated as net investment hedges			1			2

Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	Other current assets		2	Accrued expenses and other current liabilities		7
Foreign exchange forward contracts	Other long-term assets		—	Lease incentives and other long-term liabilities		—

Total derivatives not designated as hedging instruments			2			7

Total derivative instruments		$	7		$	37


	January 29, 2011
	Asset Derivatives			Liability Derivatives
($ in millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as cash flow hedges:
Foreign exchange forward contracts	Other current assets	$	—	Accrued expenses and other current liabilities	$	30
Foreign exchange forward contracts	Other long-term assets		2	Lease incentives and other long-term liabilities		2

Total derivatives designated as cash flow hedges			2			32

Derivatives designated as net investment hedges:
Foreign exchange forward contracts	Other current assets		—	Accrued expenses and other current liabilities		—
Foreign exchange forward contracts	Other long-term assets		—	Lease incentives and other long-term liabilities		—

Total derivatives designated as net investment hedges			—			—

Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	Other current assets		2	Accrued expenses and other current liabilities		5
Foreign exchange forward contracts	Other long-term assets		—	Lease incentives and other long-term liabilities		—

Total derivatives not designated as hedging instruments			2			5

Total derivative instruments		$	4		$	37


	October 30, 2010
	Asset Derivatives			Liability Derivatives
($ in millions)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as cash flow hedges:
Foreign exchange forward contracts	Other current assets	$	2	Accrued expenses and other current liabilities	$	38
Foreign exchange forward contracts	Other long-term assets		—	Lease incentives and other long-term liabilities		11

Total derivatives designated as cash flow hedges			2			49

Derivatives designated as net investment hedges:
Foreign exchange forward contracts	Other current assets		—	Accrued expenses and other current liabilities		—
Foreign exchange forward contracts	Other long-term assets		—	Lease incentives and other long-term liabilities		—

Total derivatives designated as net investment hedges			—			—

Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	Other current assets		2	Accrued expenses and other current liabilities		7
Foreign exchange forward contracts	Other long-term assets		—	Lease incentives and other long-term liabilities		—

Total derivatives not designated as hedging instruments			2			7

Total derivative instruments		$	4		$	56

Substantially all of the unrealized gains and losses from designated cash flow hedges as of October 29, 2011 will be recognized in income within the next 12 months at the then current values, which may differ from the fair values as of October 29, 2011 shown above.

See Note 5 of Notes to Condensed Consolidated Financial Statements for disclosures on the fair value measurements of our derivative financial instruments.

The effects of derivative financial instruments on OCI and the Condensed Consolidated Statements of Income, on a pre-tax basis, are as follows:


	Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion)
	13 Weeks Ended						39 Weeks Ended
($ in millions)	October 29, 2011			October 30, 2010			October 29, 2011			October 30, 2010
Derivatives in cash flow hedging relationships:
Foreign exchange forward contracts	$	16		$	(37	)	$	(38	)	$	(57	)
Treasury rate lock agreements		—			—			1			—

	$	16		$	(37	)	$	(37	)	$	(57	)


	Amount and Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
	13 Weeks Ended						39 Weeks Ended
($ in millions)	October 29, 2011			October 30, 2010			October 29, 2011			October 30, 2010
Derivatives in cash flow hedging relationships:
Foreign exchange forward contracts - Cost of goods sold and occupancy expenses	$	(16	)	$	(7	)	$	(37	)	$	(22	)
Foreign exchange forward contracts - Operating expenses		(1	)		(2	)		(4	)		(3	)

	$	(17	)	$	(9	)	$	(41	)	$	(25	)


	Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion)
	13 Weeks Ended						39 Weeks Ended
($ in millions)	October 29, 2011			October 30, 2010			October 29, 2011			October 30, 2010
Derivatives in net investment hedging relationships:
Foreign exchange forward contracts	$	(1	)	$	—		$	(3	)	$	(5	)


	Amount and Location of Gain (Loss) Recognized in Income on Derivatives
	13 Weeks Ended						39 Weeks Ended
($ in millions)	October 29, 2011			October 30, 2010			October 29, 2011			October 30, 2010
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts - Operating expenses	$	6		$	(2	)	$	4		$	5

For the thirteen and thirty-nine weeks ended October 29, 2011 and October 30, 2010, there were no amounts of gain or loss reclassified from accumulated OCI into income for derivative financial instruments in net investment hedging relationships, as we did not sell or liquidate (or substantially liquidate) any of our hedged subsidiaries during the periods.

See Note 9 of Notes to Condensed Consolidated Financial Statements for components of OCI, which includes changes in fair value of derivative financial instruments, net of tax, and reclassification adjustments for realized gains and losses on derivative financial instruments, net of tax.

Note 7. Share Repurchases

Share repurchase activity is as follows:


	13 Weeks Ended				39 Weeks Ended
($ and shares in millions except average per share cost)	October 29, 2011		October 30, 2010		October 29, 2011		October 30, 2010
Number of shares repurchased		39.2		15.1		106.5		67.3
Total cost	$	645	$	263	$	2,013	$	1,358
Average per share cost including commissions	$	16.46	$	17.46	$	18.90	$	20.19

In November 2009, the Board of Directors authorized $500 million for share repurchases, which was fully utilized by the end of March 2010. In connection with this authorization, we entered into purchase agreements with individual members of the Fisher family (related-party transactions). The Fisher family shares were purchased at the same weighted-average market price that we paid for share repurchases in the open market. During the thirty-nine weeks ended October 30, 2010, approximately 0.5 million shares were repurchased for $10 million from the Fisher family subject to these agreements.

Between February 2010 and February 2011, we announced that the Board of Directors authorized a total of $3.75 billion for share repurchases, of which $26 million was remaining as of October 29, 2011. In November 2011, we announced a new $500 million share repurchase authorization. We have not entered into purchase agreements with members of the Fisher family in connection with these authorizations.

All of the share repurchases were paid for as of October 29, 2011 and January 29, 2011. All except $9 million of total share repurchases were paid for as of October 30, 2010.

Note 8. Share-Based Compensation

Share-based compensation expense recognized in the Condensed Consolidated Statements of Income, primarily in operating expenses, is as follows:


	13 Weeks Ended						39 Weeks Ended
($ in millions)	October 29, 2011			October 30, 2010			October 29, 2011			October 30, 2010
Stock units	$	11		$	12		$	35		$	48
Stock options		4			3			12			10
Employee stock purchase plan		1			1			3			3

Share-based compensation expense		16			16			50			61
Less: Income tax benefit		(7	)		(6	)		(20	)		(24	)

Share-based compensation expense, net of tax	$	9		$	10		$	30		$	37

Note 9. Comprehensive Income

Comprehensive income is comprised of net income and other gains and losses affecting equity that are excluded from net income. Comprehensive income, net of tax, consists of the following:


	13 Weeks Ended						39 Weeks Ended
($ in millions)	October 29, 2011			October 30, 2010			October 29, 2011			October 30, 2010
Net income	$	193		$	303		$	615		$	839
Other comprehensive income:
Foreign currency translation, net of tax (tax benefit) of $-, $2, $(1), and $2		(8	)		32			39			47
Change in fair value of derivative financial instruments, net of tax (tax benefit) of $6, $(15), $(15), and $(22)		10			(22	)		(22	)		(35	)
Reclassification adjustment for realized losses on derivative financial instruments, net of tax benefit of $7, $3, $17, and $9		10			6			24			16

Other comprehensive income, net of tax		12			16			41			28

Comprehensive income, net of tax	$	205		$	319		$	656		$	867

Note 10. Income Taxes

The Company conducts business globally, and as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, Canada, France, Hong Kong, Japan, and the United Kingdom. We are no longer subject to U.S. federal income tax examinations for fiscal years before 2008, and with few exceptions, we are also no longer subject to U.S. state, local, or non-U.S. income tax examinations for fiscal years before 2003.

As of October 29, 2011, we do not anticipate any significant increases or decreases in total gross unrecognized tax benefits within the next 12 months.

Except where required by U.S. tax law, no provision has been made for U.S. income taxes on the undistributed earnings of our foreign subsidiaries when we intend to utilize those earnings in foreign operations for an indefinite period of time.

During the thirty-nine weeks ended October 30, 2010, we recognized an interest expense reversal of $11 million from the reduction of interest expense accruals resulting primarily from the filing of a U.S. federal income tax accounting method change application and the resolution of the review conducted by the Internal Revenue Service (“IRS”) with respect to the Company’s federal income tax returns and refund claims for fiscal 2001 through 2004.

Note 11. Earnings Per Share

Weighted-average number of shares used for earnings per share is as follows:


	13 Weeks Ended				39 Weeks Ended
(shares in millions)	October 29, 2011		October 30, 2010		October 29, 2011		October 30, 2010
Weighted-average number of shares - basic		503		622		542		646
Common stock equivalents		2		4		5		5

Weighted-average number of shares - diluted		505		626		547		651

The above computations of weighted-average number of shares – diluted exclude 16 million and 17 million shares related to stock options and other stock awards for the thirteen weeks ended October 29, 2011 and October 30, 2010, respectively, and 12 million and 11 million shares related to stock options and other stock awards for the thirty-nine weeks ended October 29, 2011 and October 30, 2010, respectively, as their inclusion would have an antidilutive effect on earnings per share.

Note 12. Commitments and Contingencies

We have assigned certain store and corporate facility leases to third parties as of October 29, 2011. Under these arrangements, we are secondarily liable and have guaranteed the lease payments of the new lessees for the remaining portion of our original lease obligations at various dates through 2019. The maximum potential amount of future lease payments we could be required to make is approximately $17 million as of October 29, 2011. We recognize a liability for such guarantees when events or changes in circumstances indicate that the loss is probable and the amount of such loss can be reasonably estimated. There was no material liability recorded for the guarantees as of October 29, 2011, January 29, 2011, and October 30, 2010.

We are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters. These contracts primarily relate to our commercial contracts, operating leases, trademarks, intellectual property, financial agreements, and various other agreements. Under these contracts, we may provide certain routine indemnifications relating to representations and warranties (e.g., ownership of assets, environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. Generally, the maximum obligation under such indemnifications is not explicitly stated, and as a result, the overall amount of these obligations cannot be reasonably estimated. Historically, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our financial condition or results of operations.

As party to a reinsurance pool for workers’ compensation, general liability, and automobile liability, we have guarantees with a maximum exposure of $14 million as of October 29, 2011. We are currently in the process of winding down our participation in the reinsurance pool.

As a multinational company, we are subject to various proceedings, lawsuits, disputes, and claims (“Actions”) arising in the ordinary course of our business. Many of these Actions raise complex factual and legal issues and are subject to uncertainties. As of October 29, 2011, actions filed against us included commercial, intellectual property, employment, and data privacy claims, including class action lawsuits. The plaintiffs in some Actions seek unspecified damages or injunctive relief, or both. Actions are in various procedural stages, and some are covered in part by insurance. As of October 29, 2011, January 29, 2011, and October 30, 2010, we recorded a liability for the estimated loss if the outcome of an Action is expected to result in a loss that is considered probable and reasonably estimable. The amount of liability as of October 29, 2011, January 29, 2011, and October 30, 2010 was not material for any individual Action or in total. Subsequent to October 29, 2011 and through our filing date of December 7, 2011, no information has become available that indicates a material change to our estimate is required.

We cannot predict with assurance the outcome of Actions brought against us. Accordingly, adverse developments, settlements, or resolutions may occur and negatively impact income in the quarter of such development, settlement, or resolution. However, we do not believe that the outcome of any current Action would have a material adverse effect on our results of operations, cash flows, or financial position taken as a whole.

Note 13. Segment Information

We identify our operating segments according to how our business activities are managed and evaluated. All of our operating segments sell a group of similar products – apparel, accessories, and personal care products. We have two reportable segments:

•

Stores – The Stores reportable segment includes the results of the retail stores for Gap, Old Navy, and Banana Republic. We have aggregated the results of all Stores operating segments into one reportable segment because the operating segments have similar economic characteristics.

•

Direct – The Direct reportable segment includes the results for our online brands, both domestic and international.

Net sales by brand, region, and reportable segment are as follows:


($ in millions) 13 Weeks Ended October 29, 2011	Gap			Old Navy			Banana Republic			Other (3)			Total			Percentage of Net Sales
U.S. (1)	$	819		$	1,105		$	495		$	—		$	2,419			67	%
Canada		89			100			48			—			237			7
Europe		171			—			13			22			206			6
Asia		219			—			31			21			271			7
Other regions		—			—			—			38			38			1

Total Stores reportable segment		1,298			1,205			587			81			3,171			88
Direct reportable segment (2)		121			178			47			68			414			12

Total	$	1,419		$	1,383		$	634		$	149		$	3,585			100	%

Sales Growth (Decline)		(3	)%		(5	)%		2	%		34	%		(2	)%

($ in millions) 13 Weeks Ended October 30, 2010	Gap			Old Navy			Banana Republic			Other (3)			Total			Percentage of Net Sales
U.S. (1)	$	892		$	1,196		$	501		$	—		$	2,589			71	%
Canada		95			111			48			—			254			7
Europe		180			—			9			16			205			6
Asia		197			—			28			15			240			7
Other regions		—			—			—			24			24			—

Total Stores reportable segment		1,364			1,307			586			55			3,312			91
Direct reportable segment (2)		102			147			37			56			342			9

Total	$	1,466		$	1,454		$	623		$	111		$	3,654			100	%

Sales Growth (Decline)		3	%		(1	)%		3	%		35	%		2	%

($ in millions) 39 Weeks Ended October 29, 2011	Gap			Old Navy			Banana Republic			Other (3)			Total			Percentage of Net Sales
U.S. (1)	$	2,296		$	3,335		$	1,444		$	—		$	7,075			69	%
Canada		235			283			134			—			652			6
Europe		501			—			37			53			591			6
Asia		635			—			90			56			781			8
Other regions		—			—			—			96			96			1

Total Stores reportable segment		3,667			3,618			1,705			205			9,195			90
Direct reportable segment (2)		294			440			125			212			1,071			10

Total	$	3,961		$	4,058		$	1,830		$	417		$	10,266			100	%

Sales Growth (Decline)		(1	)%		(3	)%		1	%		32	%		—	%

($ in millions) 39 Weeks Ended October 30, 2010	Gap			Old Navy			Banana Republic			Other (3)			Total			Percentage of Net Sales
U.S. (1)	$	2,456		$	3,504		$	1,465		$	—		$	7,425			72	%
Canada		240			304			132			—			676			7
Europe		488			—			24			35			547			5
Asia		572			—			81			42			695			7
Other regions		—			—			—			62			62			—

Total Stores reportable segment		3,756			3,808			1,702			139			9,405			91
Direct reportable segment (2)		245			372			101			177			895			9

Total	$	4,001		$	4,180		$	1,803		$	316		$	10,300			100	%

Sales Growth		2	%		2	%		5	%		34	%		3	%

(1)	U.S. includes the United States and Puerto Rico.

(2)

In July 2010, we began selling products online to customers in select countries outside the U.S. using a U.S.-based third party that provides logistics and fulfillment services. In August 2010, we began selling products online to customers in select countries outside the U.S. utilizing our own logistics and fulfillment capabilities. Online sales shipped from distribution centers located outside the U.S were $34 million and $12 million for the thirteen weeks ended October 29, 2011 and October 30, 2010, respectively, and $84 million and $12 million for the thirty-nine weeks ended October 29, 2011 and October 30, 2010, respectively.

(3)	Other includes our wholesale business, franchise business, Piperlime, and Athleta.

Gap and Banana Republic outlet retail sales are reflected within the respective results of each brand.

Financial Information for Reportable Segments

Operating income is the primary measure of profit we use to make decisions on allocating resources to our operating segments and to assess the operating performance of each operating segment. It is defined as income before interest expense, interest income, and income taxes. Corporate expenses are allocated to each operating segment and recorded in operating income on a rational and systematic basis.

Reportable segment assets presented below include those assets that are directly used in, or allocable to, that segment’s operations. Total assets for the Stores reportable segment primarily consist of merchandise inventory, the net book value of store assets, and prepaid expenses and receivables related to store operations. Total assets for the Direct reportable segment primarily consist of merchandise inventory, the net book value of information technology and distribution center assets, and the net book value of goodwill and intangible assets as a result of the acquisition of Athleta. We do not allocate corporate assets to our operating segments. Unallocated corporate assets primarily include cash and cash equivalents, short-term investments, the net book value of corporate property and equipment, and tax-related assets.

Selected financial information by reportable segment and reconciliations to our consolidated totals are as follows:


	13 Weeks Ended				39 Weeks Ended
($ in millions)	October 29, 2011		October 30, 2010		October 29, 2011		October 30, 2010
Operating income:
Stores	$	255	$	420	$	836	$	1,169
Direct		91		84		230		206

Operating income	$	346	$	504	$	1,066	$	1,375


($ in millions)	October 29, 2011		January 29, 2011		October 30, 2010
Segment assets:
Stores	$	4,002	$	3,264	$	3,828
Direct		639		545		549
Unallocated		3,016		3,256		3,351

Total assets	$	7,657	$	7,065	$	7,728

Net sales by region are allocated based on the location in which the sale was originated. Store sales are allocated based on the location of the store, and online sales are allocated based on the location of the distribution center from which the products were shipped. Net sales generated in the U.S. and in foreign locations are as follows:


	13 Weeks Ended				39 Weeks Ended
($ in millions)	October 29, 2011		October 30, 2010		October 29, 2011		October 30, 2010
U.S. (1)	$	2,799	$	2,919	$	8,062	$	8,308
Foreign		786		735		2,204		1,992

Total net sales	$	3,585	$	3,654	$	10,266	$	10,300

(1)	U.S. includes the United States and Puerto Rico.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains 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,” “plan,” “project,” and similar expressions also identify forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding the following:

•

the impact of the seasonality of our operations on certain asset and liability accounts;

•

the impact of the expected adoption of new accounting pronouncements;

•

stabilizing comparable store sales in our established markets and growing revenues internationally;

•

international expansion plans, including opening additional stores, many of which will be outlets, in Canada, Europe, and Asia, online sales internationally, and additional franchising and similar arrangements;

•

income recognition of unrealized gains and losses from designated cash flow hedges;

•

significant increases or decreases in total gross unrecognized tax benefits within the next 12 months;

•

the maximum potential amount of future lease payments;

•

the impact of losses due to indemnification obligations;

•

the outcome of proceedings, lawsuits, disputes, and claims;

•

growing revenues;

•

maintaining a focus on cost management and return on invested capital;

•

generating free cash flow and returning cash to shareholders;

•

continuing to invest in long-term growth;

•

the effective tax rate in fiscal 2011;

•

current cash balances and cash flows being sufficient to support our business operations, including growth initiatives and planned capital expenditures;

•

ability to supplement near-term liquidity, if necessary, with our $500 million revolving credit facility;

•

maintaining a strong financial profile with ample liquidity;

•

capital expenditures in fiscal 2011;

•

the number of new store openings and store closings in fiscal 2011, and the number of stores at Gap brand by the end of fiscal 2013;

•

net square footage change in fiscal 2011;

•

the number of new franchise store openings in fiscal 2011;

•

dividend payments in fiscal 2011; and

•

the impact of changes in internal controls.

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. These factors include, without limitation, the following:

•

the risk that changes in general economic conditions or consumer spending patterns will have a negative impact on our financial performance or strategies;

•

the highly competitive nature of our business in the United States and internationally;

•

the risk that we, or our franchisees, will be unsuccessful in gauging fashion trends and changing consumer preferences;

•

the risk that our efforts to expand internationally may not be successful and could impair the value of our brands;

•

the risk that trade matters, sourcing costs, events causing disruptions in product shipments from China and other foreign countries, or an inability to secure sufficient manufacturing capacity may disrupt our supply chain or operations or impact our financial results;

•

the risk that our franchisees will be unable to successfully open, operate, and grow the Company’s franchised stores;

•

the risk that we, or our franchisees, will be unsuccessful in identifying, negotiating, and securing new store locations and renewing, modifying, or terminating leases for existing store locations effectively;

•

the risk that comparable sales and margins will experience fluctuations;

•

the risk that we will be unsuccessful in implementing our strategic, operating, and people initiatives;

•

the risk that changes in our credit profile or deterioration in market conditions may limit our access to the capital markets and adversely impact our financial results and our ability to service our debt while maintaining other initiatives;

•

the risk that updates or changes to our information technology (“IT”) systems may disrupt our operations;

•

the risk that our IT services agreement with IBM could cause disruptions in our operations and have an adverse effect on our financial results;

•

the risk that acts or omissions by our third-party vendors, including a failure to comply with our code of vendor conduct, could have a negative impact on our reputation or operations;

•

the risk that we do not repurchase some or all of the shares we anticipate purchasing pursuant to our repurchase program;

•

the risk that the adoption of new accounting pronouncements will impact future results;

•

the risk that changes in the regulatory or administrative landscape could adversely affect our financial condition, strategies, and results of operations; and

•

the risk that we will not be successful in defending various proceedings, lawsuits, disputes, claims, and audits.

Additional 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 29, 2011, our Quarterly Report on Form 10-Q for the period ended April 30, 2011, and our other filings with the U.S. Securities and Exchange Commission.

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 December 7, 2011, 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.

We suggest that this document be read in conjunction with Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011.

OUR BUSINESS

We are a global specialty retailer offering apparel, accessories, and personal care products for men, women, children, and babies under the Gap, Old Navy, Banana Republic, Piperlime, and Athleta brands. We have Company-operated stores in the United States, Canada, the United Kingdom, France, Ireland, Japan, and beginning in November 2010, China and Italy. We also have franchise agreements with unaffiliated franchisees to operate Gap and Banana Republic stores in many other countries around the world. Under these agreements, third parties operate or will operate stores that sell apparel and related products under our brand names. In addition, our products are available to customers online in over 90 countries. Most of the products sold under our brand names are designed by us and manufactured by independent sources. We also sell products that are designed and manufactured by branded third parties.

We identify our operating segments based on the way we manage and evaluate our business activities. We have two reportable segments: Stores and Direct.

OVERVIEW

Financial results for the third quarter of fiscal 2011 are as follows:

•

Net sales for the third quarter of fiscal 2011 decreased 2 percent to $3.59 billion compared with $3.65 billion for the third quarter of fiscal 2010. Comparable sales, which include the associated comparable online sales, for the third quarter of fiscal 2011 decreased 5 percent compared with a 1 percent increase for the third quarter of fiscal 2010.

•

Direct net sales for the third quarter of fiscal 2011 increased 21 percent to $414 million compared with $342 million for the third quarter of fiscal 2010. Our Direct reportable segment includes sales for each of our online brands.

•

Net sales for Direct and international (regions outside of the U.S. and Canada) as a percentage of total net sales for the third quarter of fiscal 2011 increased 4 percent to 26 percent compared with 22 percent for the third quarter of fiscal 2010.

•

Gross profit for the third quarter of fiscal 2011 was $1.31 billion compared with $1.51 billion for the third quarter of fiscal 2010.

•

Operating expenses for the third quarter of fiscal 2011 decreased 3 percent compared with the third quarter of fiscal 2010 and decreased 0.4 percent as a percentage of net sales.

•

Net income for the third quarter of fiscal 2011 decreased 36 percent to $193 million compared with $303 million for the third quarter of fiscal 2010, and diluted earnings per share decreased to $0.38 for the third quarter of fiscal 2011 compared with $0.48 for the third quarter of fiscal 2010.

•

During the third quarter of fiscal 2011, we repurchased about 39.2 million shares for $645 million.

Our full year business and financial priorities for fiscal 2011 remain as follows:

•

focus on growing revenues;

•

maintain a focus on cost management and return on invested capital;

•

generate free cash flow and return cash to shareholders; and

•

continue to invest in long-term growth.

As we focus on stabilizing comparable store sales in our established markets, we also plan to continue growing revenues internationally through the following:

•

opening additional stores, many of which will be outlets, in Canada, Europe, and Asia;

•

continuing to open franchise stores worldwide; and

•

continuing to offer our online shopping experience to customers in international locations.

RESULTS OF OPERATIONS

Net Sales

Net sales primarily consist of retail sales, online sales, and wholesale and franchise revenues.

See Item 1, Financial Statements, Note 13 of Notes to Condensed Consolidated Financial Statements for net sales by brand, region, and reportable segment.

Comparable Sales

Beginning in fiscal 2011, the Company reports comparable (“Comp”) sales including the associated comparable online sales. Accordingly, Comp sales for the thirteen and thirty-nine weeks ended October 30, 2010 have been recalculated to conform to fiscal 2011 presentation.

The percentage change in Comp sales by brand and region and for total Company, including the associated comparable online sales, as compared with the preceding year, is as follows:


	13 Weeks Ended						39 Weeks Ended
	October 29, 2011			October 30, 2010			October 29, 2011			October 30, 2010
Gap North America		(6	)%		2	%		(4	)%		1	%
Old Navy North America		(4	)%		—	%		(2	)%		3	%
Banana Republic North America		(1	)%		2	%		(1	)%		4	%
International		(10	)%		4	%		(7	)%		3	%
The Gap, Inc.		(5	)%		1	%		(3	)%		2	%

The percentage change in Comp store sales by brand and region and for total Company, excluding the associated comparable online sales, as compared with the preceding year, is as follows:


	13 Weeks Ended						39 Weeks Ended
	October 29, 2011			October 30, 2010			October 29, 2011			October 30, 2010
Gap North America		(8	)%		1	%		(6	)%		—	%
Old Navy North America		(8	)%		(2	)%		(5	)%		2	%
Banana Republic North America		(3	)%		1	%		(3	)%		3	%
International		(11	)%		3	%		(8	)%		2	%
The Gap, Inc.		(7	)%		—	%		(5	)%		2	%

Only Company-operated stores are included in the calculations of Comp sales. Gap and Banana Republic outlet Comp sales are reflected within the respective results of each brand.

A store is included in the Comp sales calculations when it has been open for at least one calendar year and the selling square footage has not changed by 15 percent or more within the past year. A store is included in the Comp sales calculations on the first day it has comparable prior year sales. Stores in which the selling square footage has changed by 15 percent or more as a result of a remodel, expansion, or reduction are excluded from the Comp sales calculations until the first day they have comparable prior year sales.

A store is considered non-comparable (“Non-comp”) when it has been open for less than one calendar year or has changed its selling square footage by 15 percent or more within the past year.

A store is considered “Closed” if it is temporarily closed for three or more full consecutive days or is permanently closed. When a temporarily closed store reopens, the store will be placed in the Comp/Non-comp status it was in prior to its closure. If a store was in Closed status for three or more days in the prior year, the store will be in Non-comp status for the same days the following year.

Online Comp sales are defined as sales through online channels in countries where we have existing Comp store sales.

Current year foreign exchange rates are applied to both current year and prior year Comp sales to achieve a consistent basis for comparison.

Store Count and Square Footage Information

Net sales per average square foot is as follows:


	13 Weeks Ended				39 Weeks Ended
	October 29, 2011		October 30, 2010		October 29, 2011		October 30, 2010
Net sales per average square foot (1)	$	82	$	85	$	238	$	240

(1)	Excludes net sales associated with our online, catalog, franchise, and wholesale businesses.

Store count, openings, closings, and square footage for our stores are as follows:


	January 29, 2011		39 Weeks Ended October 29, 2011				October 29, 2011
	Number of Store Locations		Number of Stores Opened		Number of Stores Closed		Number of Store Locations			Square Footage (in millions)
Gap North America		1,111		16		41		1,086			11.1
Gap Europe		184		12		5		191			1.7
Gap Asia		135		11		5		141			1.3
Old Navy North America		1,027		21		26		1,022			18.3
Banana Republic North America		576		11		4		583			4.9
Banana Republic Asia		29		1		1		29			0.2
Banana Republic Europe		5		4		—		9			0.1
Athleta North America		1		3		—		4			—

Company-operated stores total		3,068		79		82		3,065			37.6
Franchise		178		36		3		211			N/A

Total		3,246		115		85		3,276			37.6

Increase (decrease) over prior year								0.9	%		(2.1	)%

	January 30, 2010		39 Weeks Ended October 30, 2010				October 30, 2010
	Number of Store Locations		Number of Stores Opened		Number of Stores Closed		Number of Store Locations			Square Footage (in millions)
Gap North America		1,152		7		32		1,127			11.2
Gap Europe		178		11		5		184			1.6
Gap Asia		120		8		2		126			1.2
Old Navy North America		1,039		11		14		1,036			19.3
Banana Republic North America		576		4		3		577			4.9
Banana Republic Asia		27		1		—		28			0.2
Banana Republic Europe		3		2		1		4			—

Company-operated stores total		3,095		44		57		3,082			38.4
Franchise		136		33		4		165			N/A

Total		3,231		77		61		3,247			38.4

Decrease over prior year								(0.9	)%		(2.5	)%

Gap and Banana Republic outlet stores are reflected in each of the respective brands. We have franchise agreements with unaffiliated franchisees to operate Gap and Banana Republic stores in Asia, Australia, Europe, Latin America, the Middle East, and Africa.

We expect to open about 125 new Company-operated store locations and close about 150 Company-operated store locations in fiscal 2011. Through downsizes and net store closures, we expect net square footage for Company-operated stores to decrease about 2 percent for fiscal 2011. We also expect our franchisees will open about 60 new franchise stores in fiscal 2011. As a result of ongoing strategic closures and consolidations at Gap brand, we expect to have a total of about 950 Gap stores in North America by the end of fiscal 2013.

Net Sales

Our net sales for the third quarter of fiscal 2011 decreased $69 million, or 2 percent, compared with the prior year comparable period due to a decrease in net sales of $141 million related to our Stores reportable segment, offset by an increase in net sales of $72 million related to our Direct reportable segment.

•

For the Stores reportable segment, our net sales for the third quarter of fiscal 2011 decreased $141 million, or 4 percent, compared with the prior year comparable period. The decrease was primarily due to a decrease in Comp store sales, excluding the associated comparable online sales, of 7 percent for the third quarter of fiscal 2011 compared with the prior year comparable period, partially offset by the favorable impact of foreign exchange of $35 million and an increase in franchise sales. The foreign exchange impact is the translation impact if net sales for the third quarter of fiscal 2010 were translated at exchange rates applicable during the third quarter of fiscal 2011.

•

For the Direct reportable segment, our net sales for the third quarter of fiscal 2011 increased $72 million, or 21 percent, compared with the prior year comparable period. The increase was due to the growth in our online business across all brands and the incremental sales related to the introduction of international online sales in August 2010.

Our net sales for the thirty-nine weeks ended October 29, 2011 decreased $34 million, which was flat compared with the prior year comparable period, due to a decrease in net sales of $210 million related to our Stores reportable segment, offset by an increase in net sales of $176 million related to our Direct reportable segment.

•

For the Stores reportable segment, our net sales for the thirty-nine weeks ended October 29, 2011 decreased $210 million, or 2 percent, compared with the prior year comparable period. The decrease was primarily due to a decrease in Comp store sales, excluding the associated comparable online sales, of 5 percent for the thirty-nine weeks ended October 29, 2011 compared with the prior year comparable period, partially offset by the favorable impact of foreign exchange of $138 million and an increase in franchise sales. The foreign exchange impact is the translation impact if net sales for the thirty-nine weeks ended October 30, 2010 were translated at exchange rates applicable during the thirty-nine weeks ended October 29, 2011.

•

For the Direct reportable segment, our net sales for the thirty-nine weeks ended October 29, 2011 increased $176 million, or 20 percent, compared with the prior year comparable period. The increase was due to the growth in our online business across all brands and the incremental sales related to the introduction of international online sales in August 2010.

Cost of Goods Sold and Occupancy Expenses


	13 Weeks Ended						39 Weeks Ended
($ in millions)	October 29, 2011			October 30, 2010			October 29, 2011			October 30, 2010
Cost of goods sold and occupancy expenses	$	2,271		$	2,149		$	6,397		$	6,080
Gross profit	$	1,314		$	1,505		$	3,869		$	4,220
Cost of goods sold and occupancy expenses as a percentage of net sales		63.3	%		58.8	%		62.3	%		59.0	%
Gross margin		36.7	%		41.2	%		37.7	%		41.0	%

Cost of goods sold and occupancy expenses as a percentage of net sales increased 4.5 percent in the third quarter of fiscal 2011 compared with the prior year comparable period.

•

Cost of goods sold increased 4 percent as a percentage of net sales in the third quarter of fiscal 2011 compared with the prior year comparable period. The increase in cost of goods sold as a percentage of net sales was primarily driven by increased cost of merchandise.

•

Occupancy expenses increased 0.5 percent as a percentage of net sales in the third quarter of fiscal 2011 compared with the prior year comparable period. The increase in occupancy expenses as a percentage of net sales was primarily driven by lower net sales for the Stores reportable segment without a corresponding decrease in occupancy expenses, partially offset by higher net sales for the Direct reportable segment.

Cost of goods sold and occupancy expenses as a percentage of net sales increased 3.3 percent during the thirty-nine weeks ended October 29, 2011 compared with the prior year comparable period.

•

Cost of goods sold increased 3.1 percent as a percentage of net sales during the thirty-nine weeks ended October 29, 2011 compared with the prior year comparable period. The increase in cost of goods sold as a percentage of net sales was primarily driven by increased cost of merchandise.

•

Occupancy expenses increased 0.2 percent as a percentage of net sales during the thirty-nine weeks ended October 29, 2011 compared with the prior year comparable period. The increase in occupancy expenses as a percentage of net sales was primarily driven by lower net sales for the Stores reportable segment without a corresponding decrease in occupancy expenses, partially offset by higher net sales for the Direct reportable segment.

Operating Expenses


	13 Weeks Ended						39 Weeks Ended
($ in millions)	October 29, 2011			October 30, 2010			October 29, 2011			October 30, 2010
Operating expenses	$	968		$	1,001		$	2,803		$	2,845
Operating expenses as a percentage of net sales		27.0	%		27.4	%		27.3	%		27.6	%
Operating margin		9.7	%		13.8	%		10.4	%		13.3	%

Operating expenses decreased $33 million, or 0.4 percent as a percentage of net sales, in the third quarter of fiscal 2011 compared with the prior year comparable period. The decrease in operating expenses was primarily due to higher income from fees earned under the private label and co-branded credit card agreements and lower corporate overhead expenses, partially offset by an increase in marketing expenses and store payroll and benefits.

Operating expenses decreased $42 million, or 0.3 percent as a percentage of net sales, during the thirty-nine weeks ended October 29, 2011 compared with the prior year comparable period. The decrease in operating expenses was primarily due to higher income from fees earned under the private label and co-branded credit card agreements and lower corporate overhead expenses, partially offset by an increase in marketing expenses and store payroll and benefits.

Interest Expense (Reversal)


	13 Weeks Ended				39 Weeks Ended
($ in millions)	October 29, 2011		October 30, 2010		October 29, 2011		October 30, 2010
Interest expense (reversal)	$	22	$	3	$	50	$	(6	)

Interest expense for the third quarter and thirty-nine weeks ended October 29, 2011 primarily consists of interest expense related to our $1.25 billion long-term debt, which was issued in April 2011, and $400 million term loan, which was funded in May 2011.

Interest expense for the thirty-nine weeks ended October 30, 2010 includes an interest expense reversal of $11 million from the reduction of interest expense accruals resulting primarily from the filing of a U.S. federal income tax accounting method change application and the resolution of the IRS’s review of the Company’s federal income tax returns and refund claims for fiscal 2001 through 2004.

Interest Income


	13 Weeks Ended						39 Weeks Ended
($ in millions)	October 29, 2011			October 30, 2010			October 29, 2011			October 30, 2010
Interest income	$	(1	)	$	(1	)	$	(3	)	$	(4	)

Interest income is earned on our cash and cash equivalents and investments. The decrease in interest income for the thirty-nine weeks ended October 29, 2011 compared with the prior year comparable period was primarily due to slightly lower interest rates and a lower monthly average cash balance during the thirty-nine weeks ended October 29, 2011.

Income Taxes


	13 Weeks Ended						39 Weeks Ended
($ in millions)	October 29, 2011			October 30, 2010			October 29, 2011			October 30, 2010
Income taxes	$	132		$	199		$	404		$	546
Effective tax rate		40.6	%		39.6	%		39.6	%		39.4	%

The increase in the effective tax rate for the thirteen and thirty-nine weeks ended October 29, 2011 compared with the prior year comparable periods was primarily due to projected operating losses in China and Hong Kong for fiscal 2011 (for which no tax benefit has been provided) and their greater impact due to lower expected Gap Inc. pre-tax income for fiscal 2011, as well as the projected unfavorable impact of a change in the mix of income between domestic and foreign operations for fiscal 2011.

We currently expect the fiscal 2011 effective tax rate to be about 40 percent. The actual rate will ultimately depend on several variables, including the mix of income between domestic and international operations, the overall level of income, the potential resolution of outstanding tax contingencies, and changes in tax laws and rates.

LIQUIDITY AND CAPITAL RESOURCES

Our largest source of operating cash flows is cash collections from the sale of our merchandise. Our primary uses of cash include merchandise inventory purchases, occupancy costs, personnel-related expenses, purchases of property and equipment, payment of taxes, and share repurchases. In addition to share repurchases, we also continue to return cash to our shareholders in the form of dividends.

In the first quarter of fiscal 2011, we made the strategic decision to issue debt in the aggregate amount of $1.65 billion. Given favorable market conditions and our history of generating consistent and strong operating cash flow, we took this step to provide a more optimal capital structure. The Company has generated annual cash flow from operations in excess of $1 billion per year for the past decade and ended fiscal 2010 with $1.7 billion of cash and cash equivalents and short-term investments on its balance sheet. We remain committed to maintaining a strong financial profile with ample liquidity. Proceeds from the debt issuance are used for general corporate purposes including share repurchases.

As of October 29, 2011, cash and cash equivalents and short-term investments were $1.4 billion. We believe that current cash balances and cash flows from our operations will be sufficient to support our business operations, including growth initiatives and planned capital expenditures, for the next 12 months and beyond. We are also able to supplement near-term liquidity, if necessary, with our $500 million revolving credit facility.

Cash Flows from Operating Activities

Net cash provided by operating activities during the thirty-nine weeks ended October 29, 2011 decreased $298 million compared with the prior year comparable period, primarily due to a decrease in net income of $224 million.

We fund inventory expenditures during normal and peak periods through cash flows from operating activities and available cash. Our business follows a seasonal pattern, with sales peaking over a total of about eight weeks during the end-of-year holiday period. The seasonality of our operations may lead to significant fluctuations in certain asset and liability accounts between fiscal year-end and subsequent interim periods.

Cash Flows from Investing Activities

Our cash outflows from investing activities are primarily for capital expenditures and purchases of investments, while cash inflows are primarily proceeds from maturities of investments. Net cash used for investing activities during the thirty-nine weeks ended October 29, 2011 decreased $90 million compared with the prior year comparable period, primarily due to $75 million of net maturities of short-term investments in the thirty-nine weeks ended October 29, 2011 compared with $25 million of net purchases of short-term investments in the thirty-nine weeks ended October 30, 2010.

For fiscal 2011, we expect capital expenditures to be about $575 million.

Cash Flows from Financing Activities

Our cash outflows from financing activities consist primarily of the repurchases of our common stock and dividend payments. Cash inflows primarily consist of proceeds from the issuance of long-term debt. Net cash used for financing activities during the thirty-nine weeks ended October 29, 2011 decreased $1 billion compared with the prior year comparable period, primarily due to the following:

•

$1.65 billion of proceeds from our issuance of long-term debt in the thirty-nine weeks ended October 29, 2011; partially offset by

•

$661 million more repurchases of common stock in the thirty-nine weeks ended October 29, 2011 compared with the prior year comparable period.

Free Cash Flow

Free cash flow is a non-GAAP financial measure. We believe free cash flow is an important metric because it represents a measure of how much cash a company has available for discretionary and non-discretionary items after the deduction of capital expenditures, as we require regular capital expenditures to build and maintain stores and purchase new equipment to improve our business. We use this metric internally, as we believe our sustained ability to generate free cash flow is an important driver of value creation. However, this non-GAAP financial measure is not intended to supersede or replace our GAAP result.

The following table reconciles free cash flow, a non-GAAP financial measure, from a GAAP financial measure.


	39 Weeks Ended
($ in millions)	October 29, 2011			October 30, 2010
Net cash provided by operating activities	$	638		$	936
Less: Purchases of property and equipment		(416	)		(413	)

Free cash flow	$	222		$	523

Debt

In April 2011, we issued $1.25 billion aggregate principal amount of 5.95 percent Notes due April 2021 and received proceeds of $1.24 billion in cash, net of underwriting and other fees. The net proceeds are available for general corporate purposes, including repurchases of our common stock. Interest is payable semi-annually on April 12 and October 12 of each year and commenced on October 12, 2011. We have an option to call the Notes in whole or in part at any time, subject to a make whole premium. The Notes agreement is unsecured and does not contain any financial covenants.

In April 2011, we also entered into a $400 million, five-year, unsecured term loan due April 2016, which was funded in May 2011. Repayments of $40 million are payable on April 7 of each year, commencing on April 7, 2012, with a final repayment of $240 million due on April 7, 2016. In addition, interest is payable at least quarterly based on an interest rate equal to LIBOR plus a margin based on our long-term senior unsecured credit ratings. The term loan agreement contains financial and other covenants including, but not limited to, limitations on liens and subsidiary debt as well as the maintenance of two financial ratios – a fixed charge coverage ratio and a leverage ratio. Violation of these covenants could result in a default under the term loan agreement, which would require the immediate repayment of outstanding amounts.

Credit Facilities

On April 7, 2011, we obtained new long-term senior unsecured credit ratings from Moody’s and Fitch. Moody’s assigned a rating of Baa3, and Fitch assigned a rating of BBB-. Standard & Poor’s continues to rate us BB+. As of October 29, 2011, there were no changes in these credit ratings. Any future reduction in the Moody’s or Standard & Poor’s ratings would increase our interest expense related to our $400 million term loan and any future interest expense if we were to draw on the Facility.

In September 2010, we entered into two separate agreements to make unsecured revolving credit facilities available for our operations in China (the “China Facilities”). The China Facilities are uncommitted and are available for borrowings, overdraft borrowings, and issuances of bank guarantees. The 196 million Chinese yuan (approximately $30 million as of October 29, 2011) China Facilities were set to expire in August 2011 but were renewed under substantially similar terms through September 2012. As of October 29, 2011, there were borrowings of $12 million (78 million Chinese yuan) at an interest rate of 6.53 percent under the China Facilities. The net availability of the China Facilities, reflecting these borrowings, was approximately $18 million as of October 29, 2011.

As of October 29, 2011, we also had a $100 million, two-year, unsecured committed letter of credit agreement with an expiration date of September 2012. As of October 29, 2011, we had no trade letters of credit issued under this letter of credit agreement. Trade letters of credit represent a payment undertaking guaranteed by a bank on our behalf to pay a vendor a given amount of money upon presentation of specific documents demonstrating that merchandise has shipped.

Dividend Policy

In determining whether and at what level to declare a dividend, we consider a number of factors including sustainability, operating performance, liquidity, and market conditions.

We paid a dividend of $0.3375 per share and $0.30 per share during the thirty-nine weeks ended October 29, 2011 and October 30, 2010, respectively. We intend to pay an annual dividend per share of $0.45 for fiscal 2011, which is an increase of $0.05 compared with $0.40 for fiscal 2010.

Share Repurchases

Between February 2010 and February 2011, we announced that the Board of Directors authorized a total of $3.75 billion for share repurchases, of which $26 million was remaining as of October 29, 2011. In November 2011, we announced that the Board of Directors authorized an additional $500 million for share repurchases.

During the thirty-nine weeks ended October 29, 2011, we repurchased approximately 106.5 million shares for $2.0 billion, including commissions, at an average price per share of $18.90.

Summary Disclosures about Contractual Cash Obligations and Commercial Commitments

There have been no significant changes to our contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K as of January 29, 2011, other than those which occur in the normal course of business and the $1.25 billion Notes and $400 million term loan discussed above. See Item 1, Financial Statements, Note 12 of Notes to Condensed Consolidated Financial Statements for disclosures on commitments and contingencies.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

In April 2011, we issued $1.25 billion aggregate principal amount of 5.95 percent Notes due April 2021 and received proceeds of $1.24 billion in cash, net of underwriting and other fees. Interest is payable semi-annually on April 12 and October 12 of each year and commenced on October 12, 2011. The Notes are not subject to market risk, as they have a fixed interest rate.

Our interest rate risk associated with the term loan as of October 29, 2011 is as follows:


	Expected Maturity Date (Fiscal Year)
($ in millions)	2011			2012			2013			2014			2015			2016			Thereafter			Total			Fair Value (1)
Principal payments	$	—		$	40		$	40		$	40		$	40		$	240		$	—		$	400		$	400

Average interest rate (2)		2	%		2	%		2	%		2	%		2	%		2	%		2	%		2	%

(1)	The carrying value of the term loan approximates its fair value, as the interest rate varies depending on market rates and our credit rating.

(2)	The average interest rate for all periods presented was calculated based on LIBOR plus a margin, including fees, based on our long-term senior unsecured credit ratings as of October 29, 2011. As the interest rate for the term loan is variable, it is subject to change for all periods presented.

Other than the issuance of the Notes and the term loan described above, our market risk profile as of October 29, 2011 has not significantly changed since January 29, 2011. Our market risk profile as of January 29, 2011 is disclosed in our Annual Report on Form 10-K. See Item 1, Financial Statements, Notes 5 and 6 of Notes to Condensed Consolidated Financial Statements for disclosures on our investments and derivative financial instruments.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s third quarter of fiscal 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings.

Item 1A.

Risk Factors.

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 29, 2011 and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the period ended April 30, 2011.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

The following table presents information with respect to purchases of common stock of the Company made during the thirteen weeks ended October 29, 2011 by The Gap, Inc. or any affiliated purchaser, as defined in Exchange Act Rule 10b-18(a)(3):


	Total Number of Shares Purchased		Average Price Paid Per Share Including Commissions		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or approximate dollar amount) of Shares that May Yet be Purchased Under the Plans or Programs (1)
Month #1 (July 31 - August 27)		16,789,960	$	16.63		16,789,960	$	392 million
Month #2 (August 28 - October 1)		17,753,942	$	16.20		17,753,942	$	104 million
Month #3 (October 2 - October 29)		4,625,157	$	16.80		4,625,157	$	26 million

Total		39,169,059				39,169,059

(1)	On February 24, 2011, we announced that our Board of Directors approved $2 billion for share repurchases. On November 17, 2011, we announced that our Board of Directors approved an additional $500 million for share repurchases. These authorizations have no expiration date.

Item 6.

Exhibits.


10.1*		The Gap, Inc. Deferred Compensation Plan, as amended and restated effective September 1, 2011.
31.1*		Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002)
31.2*		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002)
32.1*		Certification of the Chief Executive Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of the Chief Financial Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101^		The following materials from The Gap, Inc.’s Quarterly Report on Form 10-Q for the quarter ended October 29, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements.

*	Filed herewith.

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	THE GAP, INC.

Date: December 7, 2011	By	/s/ Glenn K. Murphy
		Glenn K. Murphy
		Chairman and Chief Executive Officer

Date: December 7, 2011	By	/s/ Sabrina L. Simmons
		Sabrina L. Simmons
		Executive Vice President and Chief Financial Officer

Exhibit Index


10.1*		The Gap, Inc. Deferred Compensation Plan, as amended and restated effective September 1, 2011.
31.1*		Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002)
31.2*		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of The Gap, Inc. (Section 302 of the Sarbanes-Oxley Act of 2002)
32.1*		Certification of the Chief Executive Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of the Chief Financial Officer of The Gap, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101^		The following materials from The Gap, Inc.’s Quarterly Report on Form 10-Q for the quarter ended October 29, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements.

*	Filed herewith.

Exhibit 10.1

GAP, INC.

DEFERRED COMPENSATION PLAN

(Originally Effective January 1, 2006)

(As Amended and Restated Effective September 1, 2011)

TABLE OF CONTENTS


			PAGE

SECTION 1		INTRODUCTION		1
	1.1	Purpose		1
	1.2	Effective Date; Plan Year		1
	1.3	Plan Administration		1
	1.4	Unfunded Nature of Plan		2

SECTION 2		DEFINITIONS		3
	2.1	Account		3
	2.2	Accounting Date		3
	2.3	Beneficiary		3
	2.4	Board		3
	2.5	Bonus		3
	2.6	Bonus Deferrals		3
	2.7	Code		3
	2.8	Committee		3
	2.9	Company		4
	2.10	Compensation		4
	2.11	Compensation Committee		4
	2.12	Compensation Deferrals		4
	2.13	Continuous Service		4
	2.14	Effective Date		5
	2.15	Eligible Individual		5
	2.16	Employee		5
	2.17	Employer		5
	2.18	ERISA		5
	2.19	Gap Stock Fund		5
	2.20	Investment Funds		6
	2.21	Matching Contributions		6
	2.22	Participant		6
	2.23	Plan		6
	2.24	Plan Year/Plan Year Quarter/Fiscal Year		6
	2.25	Retirement		6
	2.26	Social Security Taxable Wage Base		6
	2.27	Spouse		6
	2.28	Termination Date		7
	2.29	Other Definitions

SECTION 3		ELIGIBILITY AND PARTICIPATION		8
	3.1	Initial Eligibility		8
	3.2	Cessation of Participation		8
	3.3	Eligibility for Matching Contributions		8

TABLE OF CONTENTS

(continued)


			PAGE

SECTION 4		DEFERRALS AND CONTRIBUTIONS		9
	4.1	Compensation Deferrals		9
	4.2	Bonus Deferrals		10
	4.3	Matching Contributions		11
	4.4	No Election Changes During Plan Year		11
	4.5	Crediting of Deferrals		11
	4.6	Reduction of Deferrals or Contributions		12

SECTION 5		NOTIONAL INVESTMENTS		13
	5.1	Investment Funds		13
	5.2	Investment Fund Elections		13
	5.3	Investment Fund Transfers		13

SECTION 6		ACCOUNTING		15
	6.1	Individual Accounts		15
	6.2	Adjustment of Accounts		15
	6.3	Accounting Methods		15
	6.4	Statement of Account		16

SECTION 7		VESTING		17

SECTION 8		FUNDING		18

SECTION 9		DISTRIBUTION OF ACCOUNTS		19
	9.1	Distribution of Accounts Prior to Retirement Date		19
	9.2	Distribution of Accounts After Retirement Date		20
	9.3	Key Employees		21
	9.4	Mandatory Cash-Outs of Small Amounts		21
	9.5	Designation of Beneficiary		21
	9.6	Reemployment		22
	9.7	Special Distribution Rules		22

SECTION 10		GENERAL PROVISIONS		24
	10.1	Interests Not Transferable		24
	10.2	Employment Rights		24
	10.3	Litigation by Participants or Other Persons		24
	10.4	Evidence		24
	10.5	Waiver of Notice		24
	10.6	Controlling Law		24
	10.7	Statutory References		25
	10.8	Severability		25
	10.9	Action By the Company, the Employers or the Committee		25
	10.10	Headings and Captions		25
	10.11	Gender and Number		25

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TABLE OF CONTENTS

(continued)


			PAGE

	10.12	Examination of Documents		25
	10.13	Elections		25
	10.14	Manner of Delivery		26
	10.15	Facility of Payment		26
	10.16	Missing Persons		26
	10.17	Recovery of Benefits		27
	10.18	Effect on Other Benefits		27
	10.19	Tax and Legal Effects		27

SECTION 11		PLAN ADMINISTRATION		28
	11.1	Establishment of Committee		28
	11.2	Committee General Powers, Rights, and Duties		28
	11.3	Interested Committee Member		29
	11.4	Compensation and Expenses		29
	11.5	Information Required by Company		29
	11.6	Uniform Application of Rules		30
	11.7	Review of Benefit Determinations		30
	11.8	Company’s Decision Final		30

SECTION 12		AMENDMENT AND TERMINATION		31

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GAP, INC.

DEFERRED COMPENSATION PLAN

(Originally Effective January 1, 2006)

(As Amended and Restated Effective September 1, 2011)

SECTION 1 INTRODUCTION

1.1 Purpose

The Gap, Inc. (the “Company”) has established Gap, Inc. Deferred Compensation Plan (the “Plan”), to provide certain supplemental benefits to a select group of management employees of the Employers under the Plan, and to non-employee members of the Board of Directors of the Company, who contribute materially to the continued growth, development, and future success of the Employers.

The Plan is intended to comply with the American Jobs Creation Act of 2004, Code Section 409A, and related guidance. Accordingly, the provisions of the Plan shall be applied, construed and administered in compliance with the applicable requirements of Code Section 409A and the Treasury Regulations thereunder. In addition, should there arise any ambiguity as to whether any provisions of this Plan would contravene one or more applicable requirements or limitations of Code Section 409A, such provisions shall be interpreted, administered and applied in a manner that complies with the applicable requirements of Code Section 409A and the Treasury Regulations thereunder. For purposes of Code Section 409A, all payments to be made on account of termination of employment shall only be made upon of a “separation from service” under Code Section 409A and the Treasury Regulations thereunder. Payments under the Plan shall be paid on a permissible payment event in a manner that complies with Code Section 409A and the Treasury Regulations thereunder. In no event shall a Participant, directly or indirectly, designate the calendar year of payment.

The Plan is intended to constitute an account balance plan (as defined in IRS Notice 2005-1, Q&A-9).

1.2 Effective Date; Plan Year

The Plan is hereby effective January 1, 2006, except as otherwise set forth herein. The Plan is administered on the basis of a Plan Year, as defined in subsection 2.24.

1.3 Plan Administration

The Company shall be the administrator (as that term is defined in Section 3(16)(A) of ERISA) of the Plan and shall be responsible for the administration of the Plan; provided, however, the Company may delegate all or any part of its powers, rights and duties under the Plan to such person or persons as it may deem advisable. Any notice or document relating to the Plan which is to be filed with the Company may be delivered, or mailed by registered or certified mail, postage pre-paid, to the Company, or to any designated Company representative, in care of the Company, at its principal office.

1.4 Unfunded Nature of Plan

The Plan is an unfunded, nonqualified deferred compensation plan that is intended to qualify for the exemptions provided in Sections 201, 301, and 401 of ERISA. Participants (and their Beneficiaries) shall have only those rights to payments as set forth in the Plan and shall be considered general, unsecured creditors of the Employers with respect to any such rights.

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SECTION 2 DEFINITIONS

2.1 Account

“Account” means all notional accounts and subaccounts maintained for a Participant in order to reflect his interest under the Plan, as described in Section 6.

2.2 Accounting Date

“Accounting Date” means each day designated by the Company as of which the value of an Investment Fund is adjusted for notional deferrals, contributions, distributions, gains, losses, or expenses. To the extent not otherwise designated by the Committee, each Investment Fund will be valued as of each day on which the New York Stock Exchange is open for trading.

2.3 Beneficiary

“Beneficiary” means the person or persons to whom a deceased Participant’s benefits are payable under subsection 9.5.

2.4 Board

“Board” means the Board of Directors of the Company, as from time to time constituted.

2.5 Bonus

“Bonus” means an award of cash contingent upon the achievement of specified performance goals and payable to an Employee in a given year, with respect to the immediately preceding bonus performance period. “Sign-on Bonus” means an award of cash payable to the Employee upon or within a short period of time after date of hire, as determined in accordance with the Company’s compensation policies.

2.6 Bonus Deferrals

“Bonus Deferrals” means the amounts credited to a Participant’s Bonus Deferral Account pursuant to the Participant’s election made in accordance with subsection 4.2.

2.7 Code

“Code” means the Internal Revenue Code of 1986, as amended. Reference to a specific section of the Code shall include such section, any valid regulation promulgated thereunder, and any comparable provision of any future legislation amending, supplementing, or superseding such section.

2.8 Committee

“Committee” means the US Savings Plan Investment Committee of the Company, as described in Section 11.

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2.9 Company

“Company” means The Gap, Inc. or any successor organization or entity that assumes the Plan.

2.10 Compensation

With respect to any Participant who is an Employee, “Compensation” means the Participant’s total remuneration from the Employer while the Participant is an Eligible Individual which, absent a deferral election under the Plan, would have otherwise been received by the Employee in the taxable year (excluding bonuses and taxable and nontaxable fringe benefits, and excluding overtime and commission payments; provided, however, that Compensation shall include vacation pay and vacation payouts, and all amounts contributed by an Employer pursuant to a salary reduction agreement which are not includable in the Employee’s gross income under sections 125, 132(f), or 402(e)(3) of the Code) payable for pay periods commencing on or after the Effective Date; provided, however, that Compensation shall be determined for these purposes without regard to the dollar limitations in effect for qualified plans under Section 401(a)(17) of the Code. With respect to any Participant who is a non-employee member of the Board, “Compensation” means all cash remuneration which, absent a deferral election under the Plan, would have otherwise been received by the Board member in the taxable year, payable (for Fiscal Year quarters commencing after the Effective Date) to the Board member for service on the Board and on Board committees, including any cash payable for attendance at Board meetings and Board committee meetings, but not including any amounts constituting reimbursements of expenses to Board members.

2.11 Compensation Committee

“Compensation Committee” means the Compensation and Management Development Committee of the Company.

2.12 Compensation Deferrals

“Compensation Deferrals” means the amounts credited to a Participant’s Compensation Deferral Account pursuant to the Participant’s election made in accordance with subsection 4.1.

2.13 Continuous Service

The term “Continuous Service” shall have the meaning assigned to such term in the GapShare 401(k) Plan.

2.14 Effective Date

“Effective Date” means January 1, 2006.

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2.15 Eligible Individual

“Eligible Individual” means each non-employee member of the Board or Employee of an Employer who satisfies the requirements set forth in Section 3. With respect to Employees, “Eligible Individual” does not include any Employee who is employed in a country other than the United States of America (“U.S.”) unless he: (i) has been temporarily transferred to employment with the Employers in a non-U.S. country; (ii) is a citizen or resident alien of the U.S. at the time of the transfer; and (iii) remains on the U.S. payroll.

2.16 Employee

“Employee” means a person who is employed by an Employer, is on the Employer’s regular payroll, and is treated and/or classified by the Employer as a common law employee for purposes of wage withholding for Federal income taxes. If a person is not considered to be an Employee of the Employer in accordance with the preceding sentence, a subsequent determination by the Employer, any governmental agency, or a court that the person is a common law employee of the Employer, even if such determination is applicable to prior years, will not have a retroactive effect for purposes of eligibility to participate in the Plan.

2.17 Employer

“Employer” means The Gap, Inc. and any affiliate or subsidiary of the Company as defined in Subsections 414(b) and (c) of the Code that has adopted the Plan on behalf of its Eligible Individuals with the consent of the Company.

2.18 ERISA

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended. Reference to a specific section of ERISA shall include such section, any valid regulation promulgated thereunder, and any comparable provision of any future legislation amending, supplementing, or superseding such section.

2.19 Gap Stock Fund

“Gap Stock Fund” means an Investment Fund offered under the Plan having a notional investment return based on the performance of the common stock of the Company, in accordance with rules and procedures established by the Committee. Effective January 1, 2009, the Gap Stock Fund shall be frozen and no new notional investments shall be made to the Gap Stock fund after December 31, 2008. Effective January 1, 2009, a Participant shall not be permitted to elect to transfer additional amounts into the Gap Stock Fund. The Gap Stock Fund shall be liquidated on March 2, 2009.

2.20 Investment Funds

“Investment Funds” means the notional funds or other investment vehicles designated pursuant to subsection 5.1.

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2.21 Matching Contributions

“Matching Contributions” means the amounts credited to a Participant’s Matching Contribution Account under the Plan by the Employer, in accordance with subsection 4.3.

2.22 Participant

“Participant” means an Eligible Individual who meets the requirements of Section 3 and elects to make Compensation Deferrals pursuant to Section 4. By becoming a Participant and making deferrals under this Plan, each Participant agrees to be bound by the provisions of the Plan and the determinations of the Company and the Committee hereunder.

2.23 Plan

“Plan” means the Gap Inc. Deferred Compensation Plan, as set forth in this instrument and as hereafter amended from time to time.

2.24 Plan Year/Plan Year Quarter/Fiscal Year

“Plan Year” means each 12-month period beginning January 1 and ending the following December 31. “Plan Year Quarter” means each three-month period ending March 31, June 30, September 30 and December 31. “Fiscal Year” means the fiscal year of the Company.

2.25 Retirement

“Retirement” for purposes of this Plan means, with respect to an Employee Participant, the Participant’s separation from service (within the meaning of Section 409A of the Code and the regulations, notices and other guidance thereunder) with the Employers, the Company and any subsidiary or affiliate of the Company as defined in Sections 414(b) and (c) of the Code after attaining age 50, and, with respect to a non-employee Board member Participant, the Participant’s resignation or removal from the Board after attaining age 50.

2.26 Social Security Taxable Wage Base

“Social Security Taxable Wage Base” means the maximum amount of earnings subject to payroll taxes in a given year, as announced annually by the Social Security Administration.

2.27 Spouse

“Spouse” means the person to whom a Participant is legally married under applicable state law at the earlier of the date of the Participant’s death or the date payment of the Participant’s benefits commenced and who is living on the date of the Participant’s death.

2.28 Termination Date

“Termination Date” means, with respect to an Employee Participant, the date on which the Participant has a separation from service (within the meaning of Section 409A of the Code

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and the regulations, notices and other guidance thereunder, including death) with the Employers, the Company and any subsidiary or affiliate of the Company, and, with respect to a non-employee Board member Participant, the date on which the Board member resigns, is removed or otherwise terminates service on the Board (including death). The date that an Employee’s performance of services for all the Employers is reduced to a level of less than 20% of the average level of services performed in the preceding 36-month period, shall be considered a Termination Date, and the performance of services at a level of 50% or more of the average level of services performed in the preceding 36-month period shall not be considered a Termination Date.

2.29 Other Definitions

Other defined terms used in the Plan shall have the meanings given such terms elsewhere in the Plan.

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SECTION 3 ELIGIBILITY AND PARTICIPATION

3.1 Initial Eligibility

For each Plan Year, each (a) Employee of an Employer who is employed at the level of “director” or higher (as determined by the Company) and who has Compensation greater than 150% of the Social Security Taxable Wage Base for the prior Plan Year, and (b) non-employee member of the Board shall be an Eligible Individual eligible to participate in the Plan while he is determined by the Company to satisfy the criteria described in (a) immediately preceding, who is eligible to participate in the Plan by making a deferral election pursuant to Section 4. An Eligible Individual’s eligibility for any Plan Year shall be determined as of November 1 of the preceding Plan Year, based on the Eligible Individual’s position and Compensation, and on the Social Security Taxable Wage Base in effect on that November 1 date.

With respect to an Employee who first becomes an Eligible Individual (by virtue of a promotion, Compensation increase, commencement of employment with the Employers, or any other reason), the determination of such eligibility shall be based on the Employee’s position and Compensation in effect on the date of such initial eligibility, but shall be based on the Social Security Taxable Wage Base in effect during the preceding Plan Year.

Each Eligible Individual’s decision to become a Participant shall be entirely voluntary. An Eligible Individual who makes a deferral election pursuant to Section 4 shall become a Participant in the Plan.

3.2 Cessation of Participation

If a Participant ceases to be an Eligible Individual, no further Compensation Deferrals, Bonus Deferrals (if applicable) or Matching Contributions (if applicable) shall be credited to the Participant’s Accounts after the end of the Plan Year following the date the Participant ceases to be eligible, unless he is again determined to be an Eligible Individual, but the balance credited to his Accounts shall continue to be adjusted for notional investment gains and losses under the terms of the Plan and shall be distributed to him at the time and manner set forth in Section 9. An Employee or Board member shall cease to be a Participant after his Termination Date or other loss of eligibility as soon as his entire Account balance has been distributed.

3.3 Eligibility for Matching Contributions

An Employee Participant who has satisfied the length-of-service requirements necessary to become an “Eligible Employee” under the GapShare 401(k) Plan, and who has made a Compensation Deferral election pursuant to subsection 4.1 herein, shall be eligible to receive Matching Contributions described in subsection 4.3.

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SECTION 4 DEFERRALS AND CONTRIBUTIONS

4.1 Compensation Deferrals

Each Plan Year, an Eligible Individual may elect to defer receipt (in increments of one percent) of up to 75 percent (with respect to Employee Eligible Individuals) or 100 percent (with respect to non-employee Board member Eligible Individuals) of his Compensation (or such other percentages as determined by the Company) earned with respect to pay periods beginning on and after the effective date of the election (or, in the case of non-employee Board member Eligible Individuals, Compensation earned with respect to Fiscal Year quarters beginning on and after the effective date of the election); provided, however, that Compensation earned prior to the date the Participant satisfies the eligibility requirements of Section 3 shall not be eligible for deferral under this Plan. In the case of an Employee, or non-employee Board member who is rehired (or who recommences Board Service) after having previously been an Eligible Individual, the phrase “first becomes an Eligible Individual” in the first sentence of the preceding paragraph shall be interpreted to apply only where the Eligible Individual is rehired (or recommences Board Service or recommences providing services to an Employer) at least 24 months after his last day as a previously Eligible Individual prior to again becoming such an Eligible Individual. In all other cases such rehired Employee or Board Member may not elect to make Compensation Deferrals until the next date determined by the Company with respect to Compensation earned after the following January 1. Similarly, in the case of an Employee who recommences status as an Eligible Individual for any other reason after having previously lost his status as an Eligible Individual (due to Compensation fluctuations, transfer from an ineligible location or job classification, or otherwise), the phrase “first becomes an Eligible Individual” shall be interpreted to apply only where the Eligible Individual regains his status as an Eligible Individual at least 24 months after his last day as a previously Eligible Individual prior to again becoming such an Eligible Individual. In all other cases such Re-Eligible Participant may not elect to make Compensation Deferrals until the next date determined by the Company with respect to Compensation earned after the following January 1. Except as otherwise provided in this subsection, a Participant’s deferral election for a Plan Year under this subsection must be made not later than December 31 of the preceding Plan year with respect to Compensation earned during the first payroll period of the next calendar year (considered for purposes of the Plan to be the payroll period containing December 31 of the prior year) or, in the case of Board Members, Compensation earned in fiscal year quarters beginning on and after January 1 of the following calendar year. An Employee or non-employee Board member who first becomes an Eligible Individual after the Effective Date (by virtue of a promotion, Compensation increase, commencement of employment with the Employers, commencement of Board service, or any other reason) shall be provided enrollment documents (including deferral election forms) with respect to his Compensation as soon as administratively feasible following such initial eligibility. Such Eligible Individual shall be permitted to defer his Compensation earned in the pay period (as soon as administratively practicable) (or, in the case of non-employee Board members, his Compensation earned in the Fiscal Year quarter) that begins following receipt of his properly completed election forms by the Company or its designee. Any such deferral election under this subsection must be made within 30 days of the date the Employee or Board Member first becomes an Eligible Individual; provided, however, that the date that an Employee or Board

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Member first becomes Eligible for the Plan shall be determined based on proper notification of the Employee or Board Member by the Company in accordance with procedures determined by the Company. If an Eligible Individual does not elect to make Compensation Deferrals during that initial 30-day period, he may not elect to make Compensation Deferrals until the next date determined by the Company with respect to Compensation earned after the following January 1 (or, in the case of non-employee Board members, with respect to Compensation earned in the Fiscal Year quarter beginning after the following January 1).

An election to make Compensation Deferrals under this subsection 4.1 shall be irrevocable, and shall remain in effect for Compensation earned during the last payroll period ending on or before December 30 of the calendar year to which the election applies while the Participant is an Eligible Individual (or, in the case of non-Employee Board members, for Compensation earned through the Fiscal Year quarter that ends on or after December 31 of the calendar year to which the election applies). If a Participant fails to make a Compensation Deferral election for a given Plan Year, such Participant’s Compensation Deferral election for that Plan Year shall be deemed to be zero.

4.2 Bonus Deferrals

Each Plan Year, an Eligible Individual who is an Employee may elect to defer receipt (in increments of one percent) of up to 90 percent (or such other percentage as determined by the Company) of his Bonus for the next following Bonus “performance period” (generally a period of six months or longer, in which the Employee performs the services forming the basis for the Bonus) that begins in the Plan Year following the Plan Year of the Employee’s election. A Participant’s Bonus deferral election with respect to a Plan Year must be made at a time and in a manner determined by the Company, in its sole discretion, but in no event shall the deferral election be made later than December 31 of the preceding Plan Year. Notwithstanding the foregoing, effective January 1, 2008, an Employee who first becomes an Eligible Individual during a Plan Year by virtue of commencement of employment with the Employers shall be permitted to make a Bonus Deferral election to defer receipt of up to 90 percent (or such other amount as determined by the Company) of his Bonus (other than his Sign-on Bonus) into the Plan, but only if he makes such election within 30 days of first becoming an Eligible Individual. In case such Bonus Deferral election in the first year of eligibility described in the preceding sentence is made after the beginning of the Bonus performance period, the Bonus Deferral election will apply only to the portion of the Bonus equal to the total amount of the Bonus for the performance period multiplied by the ratio of the number of days remaining in the performance period after the effective date of the Bonus Deferral election over the total number of days in the performance period. If an Eligible Individual does not elect to make a Bonus Deferral election during that initial 30-day period, he may not later elect to make an election for that performance period under this subsection. Notwithstanding the foregoing, an Employee who first becomes an Eligible Individual by virtue of commencement of employment with the Employers and who is eligible to receive a Sign-on Bonus shall be permitted to defer receipt of up to 90 percent (or such other amount as determined by the Company) of his Sign-on Bonus into the Plan, but only if he makes such election within 30 days of the date he first becomes an Eligible Individual. In the event that a Participant’s Sign-on Bonus is revoked, rescinded or forfeited in accordance with

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rules established by the Company, any amount of such Sign-on Bonus deferred into the Plan, adjusted for any notional earnings or losses thereon, shall be forfeited from such Participant’s Account, and shall be applied to offset the Employers’ Matching Contributions required in succeeding Plan Years or shall be returned to the applicable Employer, at the Company’s discretion. The Company may establish procedures to limit the Investment Fund options available to a Participant with respect to Sign-on Bonus deferrals.

An election to make Bonus Deferrals under this subsection 4.2 shall be irrevocable and shall remain in effect through the end of the applicable Bonus performance period. If a Participant fails to make a Bonus Deferral election for a given Plan Year, such Participant’s Bonus Deferral election for that Plan Year shall be deemed to be zero.

4.3 Matching Contributions

Matching Contributions shall be credited to the Matching Contribution Accounts of Employee Participants who have satisfied the requirements of subsection 3.3 and in accordance with the requirements of this subsection 4.3. The amount of any such Matching Contribution with respect to a Participant shall be equal to the Participant’s Compensation Deferrals, but in no event greater than 4% of such amount of the Participant’s Compensation (earned while the Participant satisfies the eligibility requirements under Section 3 of the Plan and under the GapShare 401(k) Plan) that exceeds the annual compensation limits provided under Code Section 401(a)(17) ($220,000 in 2006).

Any Matching Contributions made on behalf of Employee Participants under this Plan shall be credited to such Employee Participants’ Matching Contribution Accounts on an annual basis, as soon as administratively feasible after December 31 of the Plan Year, but only with respect to Employee Participants employed by an Employer on the last day of the applicable Plan Year. Notwithstanding the foregoing, effective September 1, 2011, Matching Contributions will also be payable as described in this subsection 4.3 to Participants not employed on the last day of the applicable Plan Year if, as of that date, the Participant is on an Employer’s payroll pursuant to a severance pay arrangement, or the Participant retired from service from the Employers in the applicable Plan Year after attaining age sixty (60) with five (5) years of Continuous Service.

4.4 No Election Changes During Plan Year

A Participant shall not be permitted to change or revoke his deferral elections. If a Participant’s status changes such that he becomes ineligible for the Plan during a Plan Year, the Participant’s deferrals under the Plan shall continue through the end of such Plan Year, as described in subsection 3.2 .

4.5 Crediting of Deferrals

The amount of deferrals pursuant to subsections 4.1 and 4.2 shall be credited to the Participant’s Accounts as of a date not later than 15 business days after the date on which the amount (but for the deferral) otherwise would have been paid to the Participant.

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4.6 Reduction of Deferrals or Contributions

Any deferrals or contributions to be credited to a Participant’s Account under this Section may be reduced by an amount equal to the Federal or state income, payroll, or other taxes required to be withheld on such deferrals or contributions or to satisfy any necessary employee welfare plan contributions. A Participant shall be entitled only to the net amount of such deferral or contribution (as adjusted from time to time pursuant to the terms of the Plan).

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SECTION 5 NOTIONAL INVESTMENTS

5.1 Investment Funds

The Committee may designate, in its discretion, one or more Investment Funds for the notional investment of Participants’ Accounts. The Committee, in its discretion, may from time to time establish new Investment Funds or eliminate existing Investment Funds. The Investment Funds are for recordkeeping purposes only and do not allow Participants to direct any Company assets (including, if applicable, the assets of any trust related to the Plan). Each Participant’s Accounts shall be adjusted pursuant to the Participant’s notional investment elections made in accordance with this Section 5, except as otherwise determined by the Committee in its sole discretion. Effective as of the beginning of business on January 1, 2009, the Gap Stock Fund shall be frozen and no new notional investments shall be made to the Gap Stock Fund after December 31, 2008. The Gap Stock Fund shall be discontinued and liquidated as described in subsection 5.2 of the Plan.

5.2 Investment Fund Elections

A Participant may elect from among the Investment Funds for the notional investment of his Accounts from time to time in accordance with procedures established by the Company. The Company, in its discretion, may adopt (and may modify from time to time) such rules and procedures as it deems necessary or appropriate to implement the notional investment of the Participant’s Accounts. Such procedures may differ among Participants or classes of Participants, as determined by the Company in its discretion. The Company may limit, delay or restrict the notional investment of certain Participants’ Accounts in accordance with Committee rules in order to comply with Company policy and applicable law or to minimize regulated filings and disclosures. Any deferred amounts subject to a Participant’s investment election that must be so limited, delayed or restricted under such circumstances may be notionally invested in an Investment Fund designated by the Committee, or may be credited with earnings at a rate determined by the Committee, which rate may be zero. A Participant’s notional investment election shall remain in effect until later changed in accordance with the rules of the Company. If a Participant does not make a notional investment election, all deferrals by the Participant and contributions on his behalf will be deemed to be notionally invested in the Investment Fund designated by the Committee for such purpose. Notwithstanding the foregoing and any other provision of the Plan to the contrary, amounts subject to a Participant’s notional investment election to defer amounts into the Gap Stock Fund after December 31, 2008 shall be notionally invested in the RiverSource Cash Management Fund, and shall be credited with notional interest through March 1, 2009. Amounts remaining in the RiverSource Cash Management Fund or any amounts remaining in the Gap Stock Fund shall be liquidated and automatically transferred into the American Funds Balanced Fund on or as soon as administratively feasible after March 2, 2009.

5.3 Investment Fund Transfers

A Participant may elect that all or a part of his notional interest in an Investment Fund shall be transferred to one or more of the other Investment Funds. A Participant may make such

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notional Investment Fund transfers in accordance with rules established from time to time by the Company, and in accordance with subsection 5.2. Effective January 1, 2009, a Participant shall not be permitted to elect to transfer additional amounts into the Gap Stock Fund. If a Participant does not make an election to transfer amounts out of the Gap Stock Fund prior to March 1, 2009, the Participant’s Accounts invested in the Gap Stock Fund or the RiverSource Cash Management Fund shall be transferred to the American Funds Balanced Fund on or as soon as administratively feasible after March 2, 2009.

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SECTION 6 ACCOUNTING

6.1 Individual Accounts

The Company will maintain in the name of each Participant, as applicable, the following Accounts, and any subaccounts under such Accounts deemed necessary or advisable by the Company from time to time:

(a)

Compensation Deferral Account. A Compensation Deferral Account to reflect the Participant’s Compensation Deferrals and the notional gains, losses, expenses, appreciation and depreciation attributable thereto.

(b)

Bonus Deferral Account. A Bonus Deferral Account to reflect the Participant’s Bonus Deferrals, if applicable, and the notional gains, losses, expenses, appreciation and depreciation attributable thereto.

(c)

Matching Contribution Account. A Matching Contribution Account to reflect the Matching Contributions credited on behalf of the Participant, if applicable, and the notional gains, losses, expenses, appreciation and depreciation attributable thereto.

The Company may establish such rules and procedures relating to the maintenance, adjustment, and liquidation of Participants’ Accounts, the crediting of deferrals and contributions and the notional gains, losses, expenses, appreciation, and depreciation attributable thereto, as it considers necessary or advisable. In addition to the Accounts described above, the Company may maintain other Accounts or subaccounts in the names of Participants or otherwise as the Company considers necessary or desirable.

6.2 Adjustment of Accounts

Pursuant to rules established by the Company and applied on a uniform basis, Participants’ Accounts will be adjusted on each Accounting Date, except as provided in Section 9, to reflect the value of the various Investment Funds as of such date, including adjustments to reflect any deferrals and contributions, notional transfers between Investment Funds, and notional gains, losses, expenses, appreciation, or depreciation with respect to such Accounts since the previous Accounting Date. The “value” of an Investment Fund at any Accounting Date shall be based on the fair market value of the Investment Fund, as determined by the Company.

6.3 Accounting Methods

The accounting methods or formulae to be used under the Plan for purposes of monitoring Participants’ Accounts, including the calculation and crediting of notional gains, losses, expenses, appreciation, or depreciation, shall be determined by the Company in its sole discretion. The accounting methods or formulae selected by the Company may be revised from time to time.

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6.4 Statement of Account

At such times and in such manner as determined by the Company, but at least annually, each Participant will be furnished with a statement reflecting the condition of his Accounts.

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SECTION 7 VESTING

A Participant shall be fully vested at all times in his Compensation Deferral Account, Bonus Deferral Account (if applicable) and Matching Contribution Account (if applicable), except as otherwise provided in subsection 4.2 with respect to Sign-on Bonuses, which are subject to a one-year vesting period.

Neither the Company nor the Employers in any way guarantee the Participant’s Account balance from loss or depreciation. Notwithstanding any provision of the Plan to the contrary, the Participant’s Account balance is subject to Section 8.

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SECTION 8 FUNDING

No Participant or other person shall acquire by reason of the Plan any right in or title to any assets, funds, or property of the Employers whatsoever, including, without limiting the generality of the foregoing, any specific funds, assets, or other property of the Employers. Benefits under the Plan are unfunded and unsecured. A Participant shall have only an unfunded, unsecured right to the amounts, if any, payable hereunder to that Participant. The Employers’ obligations under this Plan are not secured or funded in any manner, even if the Company elects to establish a trust with respect to the Plan. Even though benefits provided under the Plan are not funded, the Company may establish a trust to assist in the payment of benefits. All investments under this Plan are notional and do not obligate the Employers (or their delegatees) to invest the assets of the Employers or of any such trust in a similar manner.

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SECTION 9 DISTRIBUTION OF ACCOUNTS

9.1 Distribution of Accounts Prior to Retirement Date

With respect to any Participant who has a Termination Date that precedes his Retirement date, an amount equal to the Participant’s Accounts (including the Compensation Deferral Account, the Bonus Deferral Account, the Matching Contribution Account, and all notional earnings thereon) shall be distributed to the Participant (or, in the case of the Participant’s death, to the Participant’s Beneficiary), in the form of a single lump sum payment. Subject to subsection 9.3 hereof, it is the Company’s intention to distribute a Participant’s Accounts payable in a lump sum under this subsection 9.1 on the first day of the fourth month following the Participant’s Termination Date, or, if calculation of the amount of the payment is not administratively practicable due to events beyond the control of the Participant or his beneficiary, during the first calendar year in which the calculation of the amount is administratively practicable. Notwithstanding any provision of the Plan to the contrary, for purposes of this Subsection, a Participant’s Accounts shall be valued as of an Accounting Date as soon as administratively feasible preceding the date such distribution is made, in accordance with rules established by the Company.

Notwithstanding the foregoing:

(a) In-Service Distribution Elections . A Participant who is an Employee may elect, in accordance with this Subsection, a distribution date for his Bonus Deferral and Compensation Deferral Accounts that is prior to his Termination Date (an “in-service distribution”). A Participant’s election of an in-service distribution date must: (i) be made at the time of his Bonus and Compensation Deferral election for a Plan Year; (ii) apply only to amounts deferred pursuant to that election; and (iii) be irrevocable. Effective for each Plan Year commencing on or after January 1, 2012, a Participant may not elect a separate in-service distribution date with respect to a particular Plan Year’s Bonus Deferrals than with respect to a particular Plan Year’s Compensation Deferrals. The applicable in service distribution date must not be earlier than five (5) years following the later of (i) the Plan Year in which the applicable Bonus would have been paid absent the deferral and (ii) the Plan Year in which the applicable Compensation would have been paid absent the deferral, or as further determined or limited in accordance with rules established by the Committee. In no event shall a Participant be permitted to elect an in-service distribution of his Matching Contribution Account.

(b) Board Compensation Deferrals . A Participant who is a non-employee Board member may elect, in accordance with Section 4, to elect a distribution date for his Compensation Deferral Account for any Plan Year that is prior to his Termination Date. A Participant’s election of a date under this subsection (b) must: (i) be made at the time of his Compensation Deferral election for a Plan Year; (ii) apply only to amounts deferred pursuant to that election; and (iii) be irrevocable. Such in-service distribution date must not be earlier than five (5) years following the Plan Year in which such Compensation would have been paid to him absent the deferral, or as further determined or limited in accordance with rules established by the Company.

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Subject to subsection 9.3 hereof, it is the intention of the company to make payments pursuant to an in-service distribution election under subparagraphs (a) or (b) of this subsection 9.1 by the end of the calendar year in which the payment was elected to be made, or, if calculation of the amount of the payment is not administratively practicable due to events beyond the control of the Participant or his beneficiary, during the first calendar year in which the calculation of the amount is administratively practicable. For purposes of such payment, the value of the Participant’s Accounts for the applicable Plan Year shall be determined as of an Accounting Date preceding the date that such distribution is made, in accordance with rules established by the Company. In the event a Participant’s Termination Date occurs prior to the date the Participant had previously elected to have an in-service distribution payment made to him, such amount shall be paid to the Participant in a single lump sum in accordance with this subsection 9.1.

9.2 Distribution of Accounts After Retirement Date

A Participant may elect to receive payments from his Accounts in the form of a single lump sum, as described in Section 9.1, or in annual installments for 5, 10, or 15 years. Such election shall not be effective if the Participant’s Termination Date occurs before he reaches his Retirement date (age 50). Subject to subsection 9.3 hereof, it is the Company’s intention to distribute a Participant’s Accounts payable in a lump sum under this subsection 9.2 on the first day of the fourth month following the Participant’s Termination Date, or, if calculation of the amount of the payment is not administratively practicable due to events beyond the control of the Participant or his beneficiary, during the first calendar year in which the calculation of the amount is administratively practicable. To the extent a Participant fails to make an election, the Participant shall be deemed to have elected to receive his distribution for that Plan Year in the form of a single lump sum. Effective for each Plan Year commencing on or after January 1, 2012, a Participant may not make a separate election with respect to his Bonus Deferrals for each Plan Year (as adjusted for gains and losses thereon) that provides for a different method of distribution from the method of distribution he elects with respect to his Compensation Deferrals (as adjusted for gains and losses thereon) for that Plan Year. The Participant’s Matching Contributions Account attributable to such Plan Year, if any (as adjusted for gains and losses thereon), shall be distributed in the same manner as his Compensation Deferral Account for such Plan Year.

(a)

Installment Elections . A Participant will be required to make his distribution election prior to the commencement of each Plan Year.

(b)

Installment Payments . It is the intention of the Company to make the first installment payment by the end of the calendar year in which occurs the Participant’s Retirement Date or death, or, if calculation of the amount of the payment is not administratively practicable due to events beyond the control of the Participant or his beneficiary, during the first calendar year in which the calculation of the amount is administratively practicable. Succeeding payments shall be made by the end of each succeeding calendar year, or as soon as administratively feasible for the Company to make such payment. The amount to

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be distributed in each installment payment shall be determined by dividing the value of the Participant’s Accounts as of an Accounting Date preceding the date of each distribution by the number of installment payments remaining to be made, in accordance with rules established by the Company. In the event of the death of the Participant prior to the full payment of his Accounts, payments will continue to be made to his Beneficiary in the same manner and at the same time as would have been payable to the Participant, but substituting the Participant’s date of death for the Participant’s Retirement Date.

9.3 Key Employees

Notwithstanding anything herein to the contrary, and subject to Code Section 409A, payment shall not be made or commence as a result of the Participant’s Termination Date to any Participant who is a key employee (defined below) before the date that is not less than six months after the Participant’s Termination Date. For this purpose, a key employee includes a “specified employee” (as defined in Code Section 409A(a)(2)(B)) during the entire 12-month period determined by the Company ending with the annual date upon which key employees are identified by the Company, and also including any Employee identified by the Company in good faith with respect to any distribution as belonging to the group of identified key employees, to a maximum of 200 such key employees, regardless of whether such Employee is subsequently determined by the Employer, any governmental agency, or a court not to be a key employee. In the event amounts are payable to a key employee in installments in accordance with subsection 9.2, the first installment shall be delayed by six months, with all other installment payments payable as originally scheduled. The identification date for determining key employees shall be each December 31 (and the new key employee list shall be updated and effective each subsequent April 1).

9.4 Mandatory Cash-Outs of Small Amounts

If the value of a Participant’s total Accounts equals the applicable dollar amount under Section 402(g) of the Code, or less at his Termination Date (or his death), or at any time thereafter, the Accounts will be paid to the Participant (or, in the event of his death, his Beneficiary) in a single lump sum, notwithstanding any election by the Participant otherwise. Subject to subsection 9.3 hereof, it is the Company’s intention to distribute a Participant’s Accounts payable in a lump sum under this subsection 9.4 on the first day of the fourth month following the Participant’s Termination Date, or, if calculation of the amount of the payment is not administratively practicable due to events beyond the control of the Participant or his beneficiary, during the first calendar year in which the calculation of the amount is administratively practicable.

9.5 Designation of Beneficiary

Each Participant from time to time may designate any individual, trust, charity or other person or persons to whom the value of the Participant’s Accounts will be paid in the event the Participant dies before receiving the value of all of his Accounts. A Beneficiary designation must be made in the manner required by the Company for this purpose. Primary and secondary

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Beneficiaries are permitted. A married participant designating a Beneficiary other than his Spouse must obtain the consent of his Spouse to such designation (in accordance with rules determined by the Company). Payments to the Participant’s Beneficiary(ies) shall be made in accordance with subsection 9.1, 9.2 or 9.4, as applicable, after the Company has received proper notification of the Participant’s death.

A Beneficiary designation will be effective only when the Beneficiary designation is filed with the Company while the Participant is alive, and a subsequent Beneficiary designation will cancel all of the Participant’s Beneficiary designations previously filed with the Company. Any designation or revocation of a Beneficiary shall be effective as only if it is received by the Company. Once received, such designation shall be effective as of the date the designation was executed, but without prejudice to the Company on account of any payment made before the change is recorded by the Company. If a Beneficiary dies before payment of the Participant’s Accounts have been made, the Participant’s Accounts shall be distributed in accordance with the Participant’s Beneficiary designation and pursuant to rules established by the Company. If a deceased Participant failed to designate a Beneficiary, or if the designated Beneficiary predeceases the Participant, the value of the Participant’s Accounts shall be payable to the Participant’s Spouse or, if there is none, to the Participant’s estate, or in accordance with such other equitable procedures as determined by the Company.

9.6 Reemployment

If a former Participant is rehired by an Employer, the Company or any affiliate or subsidiary of the Company described in Section 414(b) and (c) of the Code, regardless of whether he is rehired as an Eligible Individual (with respect to an Employee Participant), or a former Participant returns to service as a Board member, any payments being made to such Participant hereunder by virtue of his previous Termination Date shall continue. If a former Participant is rehired by the Employer (with respect to an Employee Participant) or returns to service as a Board member, and in either case any payments to be made to the Participant by virtue of his previous Termination Date have not been made or commenced, such Participant shall no longer be entitled to such payments until his subsequent Termination Date.

9.7 Special Distribution Rules

Except as otherwise provided herein and in Section 12, Account balances of Participants in this Plan shall not be distributed earlier than the applicable date or dates described in this Section 9. Notwithstanding the foregoing, in the case of payments: (i) the deduction for which would be limited or eliminated by the application of Section 162(m) of the Code; (ii) that would violate securities or other applicable laws; or (iii) that would violate loan covenants or other contractual terms to which an Employer is a party, where such a violation would result in material harm to an Employer; the payment may be delayed in the discretion of the Company. In the case of a payment described in (i) above, the payment must be deferred either to a date in the first year in which the Company reasonably anticipates that a payment of such amount would not result in a limitation of a deduction with respect to the payment of such amount under Section 162(m), or the year in which the Participant’s Termination Date occurs. In the case of a payment described in (ii) or (iii) above, payment will be made in the first calendar year in which the

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Company reasonably anticipates that the payment would not violate loan or other similar contractual terms, the violation would not result in material harm to an Employer, or the payment would not result in a violation of securities or other applicable laws. Payments intended to pay employment taxes or payments made as a result of income inclusion of an amount in a Participant’s Accounts as a result of a failure to satisfy Section 409A of the Code shall be permitted at the Company’s discretion at any time and to the extent provided in Proposed Treasury Regulations under Section 409A of the Code and IRS Notice 2005-1, Q&A-15, and any applicable subsequent guidance. “Employment taxes” shall include Federal Income Contributions Act (FICA) tax imposed under Sections 3101 and 3121(v)(2) of the Code on compensation deferred under the Plan (the “FICA Amount”), the income tax imposed under Section 3401 of the Code on the FICA Amount, and to pay the additional income tax under Section 3401 of the Code attributable to the pyramiding Section 3401 wages and taxes.

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SECTION 10 GENERAL PROVISIONS

10.1 Interests Not Transferable

The interests of persons entitled to benefits under the Plan are not subject to their debts or other obligations and, except as may be required by the tax withholding provisions of the Code or any state’s income tax act, may not be voluntarily or involuntarily sold, transferred, alienated, assigned, or encumbered. A Participant’s interest in the Plan is not transferable pursuant to a qualified domestic relations order.

10.2 Employment Rights

The Plan does not constitute a contract of employment, and participation in the Plan shall not give any Employee the right to be retained in the employ of an Employer, nor any right or claim to any benefit under the Plan, unless such right or claim has specifically accrued under the terms of the Plan. The Employers expressly reserve the right to discharge any Employee at any time.

10.3 Litigation by Participants or Other Persons

If a legal action begun against the Committee (or any member or former member thereof), an Employer, or any person or persons to whom an Employer or the Committee has delegated all or part of its duties hereunder, by or on behalf of any person results adversely to that person, or if a legal action arises because of conflicting claims to a Participant’s or other person’s benefits, the cost to the Committee (or any member or former member thereof), the Employers or any person or persons to whom the Employer or the Committee has delegated all or part of its duties hereunder of defending the action shall be charged to the extent permitted by law to the sums, if any, which were involved in the action or were payable to the Participant or other person concerned.

10.4 Evidence

Evidence required of anyone under the Plan may be by certificate, affidavit, document, or other information which the person acting on it considers pertinent and reliable, and signed, made, or presented by the proper party or parties.

10.5 Waiver of Notice

Any notice required under the Plan may be waived by the person entitled to such notice.

10.6 Controlling Law

Except to the extent superseded by laws of the United States, the laws of the State of California shall be controlling in all matters relating to the Plan.

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10.7 Statutory References

Any reference in the Plan to a Code section or a section of ERISA, or to a section of any other Federal law, shall include any comparable section or sections of any future legislation that amends, supplements, or supersedes that section.

10.8 Severability

In case any provision of the Plan shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining provisions of the Plan, and the Plan shall be construed and enforced as if such illegal and invalid provision had never been set forth in the Plan.

10.9 Action by the Company, the Employers or the Committee

Any action required or permitted to be taken by the Company or any of the Employers under the Plan shall be by resolution of its board of directors, by resolution or other action of a duly authorized committee of its board of directors, or by action of a person or persons authorized by resolution of its board of directors or such committee. Any action required or permitted to be taken by the Committee under the Plan shall be by resolution or other action of the Committee or by a person or persons duly authorized by the Committee.

10.10 Headings and Captions

The headings and captions contained in this Plan are inserted only as a matter of convenience and for reference, and in no way define, limit, enlarge, or describe the scope or intent of the Plan, nor in any way shall affect the construction of any provision of the Plan.

10.11 Gender and Number

Where the context permits, words in the masculine gender shall include the feminine and neuter genders, the singular shall include the plural, and the plural shall include the singular.

10.12 Examination of Documents

Copies of the Plan and any amendments thereto are on file at the office of the Company where they may be examined by any Participant or other person entitled to benefits under the Plan during normal business hours.

10.13 Elections

Each election or request required or permitted to be made by a Participant (or a Participant’s Spouse or Beneficiary) shall be made in accordance with the rules and procedures established by the Company and shall be effective as determined by the Company. The Company’s rules and procedures may address, among other things, the method and timing of any elections or requests required or permitted to be made by a Participant (or a Participant’s Spouse or Beneficiary).

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10.14 Manner of Delivery

Each notice or statement provided to a Participant shall be delivered in any manner established by the Company and in accordance with applicable law, including, but not limited to, electronic delivery.

10.15 Facility of Payment

When a person entitled to benefits under the Plan is a minor, under legal disability, or, in the Company’s opinion, is in any way incapacitated so as to be unable to manage his financial affairs, the Company may cause the benefits to be paid to such person’s guardian or legal representative. If no guardian or legal representative has been appointed, or if the Company so determines in its sole discretion, payment may be made to any person as custodian for such individual under the California Uniform Transfers to Minors Act or other applicable state law, or to the legal representative of such person for such person’s benefit, or the Company may direct the application of such benefits for the benefit of such person. Any payment made in accordance with the preceding sentence shall be a full and complete discharge of any liability for such payment under the Plan.

10.16 Missing Persons

The Employers and the Company shall not be required to search for or locate a Participant, Spouse, or Beneficiary. Each Participant, Spouse, and Beneficiary must file with the Company, from time to time, in writing the Participant’s, Spouse’s, or Beneficiary’s post office address and each change of post office address. Any communication, statement, or notice addressed to a Participant, Spouse, or Beneficiary at the last post office address filed with the Company, or if no address is filed with the Company, then in the case of a Participant, at the Participant’s last post office address as shown on the Employer’s records, shall be considered a notification for purposes of the Plan and shall be binding on the Participant and the Participant’s Spouse and Beneficiary for all purposes of the Plan.

If the Company is unable to locate the Participant, Spouse, or Beneficiary to whom a Participant’s Accounts are payable, the Participant’s Accounts shall be frozen as of the date on which distribution would have been completed under the terms of the Plan, and no further notional investment returns shall be credited thereto.

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If a Participant whose Accounts were frozen (or his Beneficiary) files a claim for distribution of the Accounts within 7 years after the date the Accounts are frozen, and if the Company determines that such claim is valid, then the frozen balance shall be paid by the Company to the Participant or Beneficiary in a lump sum cash payment as soon as practicable thereafter. If the Company notifies a Participant, Spouse, or Beneficiary of the provisions of this Subsection, and the Participant, Spouse, or Beneficiary fails to claim the Participant’s, Spouse’s, or Beneficiary’s benefits or make such person’s whereabouts known to the Company within 7 years after the date the Accounts are frozen, the benefits of the Participant, Spouse, or Beneficiary may be disposed of, to the extent permitted by applicable law, by one or more of the following methods:

(a)

By retaining such benefits in the Plan.

(b)

By paying such benefits to a court of competent jurisdiction for judicial determination of the right thereto.

(c)

By forfeiting such benefits in accordance with procedures established by the Company. If a Participant, Spouse, or Beneficiary is subsequently located, such benefits shall be restored (without adjustment) to the Participant, Spouse, or Beneficiary under the Plan.

(d)

By any equitable manner permitted by law under rules adopted by the Company.

10.17 Recovery of Benefits

In the event a Participant, Spouse, or Beneficiary receives a benefit payment from the Plan that is in excess of the benefit payment that should have been made to such Participant, Spouse, or Beneficiary, or in the event a person other than a Participant, Spouse, or Beneficiary receives an erroneous payment from the Plan, the Company shall have the right, on behalf of the Plan, to recover the amount of the excess or erroneous payment from the recipient. To the extent permitted under applicable law, the Company may, at its option, deduct the amount of such excess or erroneous payment from any future benefits payable to the applicable Participant, Spouse, or Beneficiary.

10.18 Effect on Other Benefits

Except as otherwise specifically provided under the terms of any other employee benefit plan of the Company, a Participant’s participation in this Plan shall not affect the benefits provided under such other employee benefit plan.

10.19 Tax and Legal Effects

The Employers, the Committee, and their representatives and delegatees do not in any way guarantee the tax treatment of benefits for any Participant, Spouse, or Beneficiary, and the Employers, the Committee, and their representatives and delegatees do not in any way guarantee or assume any responsibility or liability for the legal, tax, or other implications or effects of the Plan. In the event of any legal, tax, or other change that may affect the Plan, the Company may, in its sole discretion, take any actions it deems necessary or desirable as a result of such change.

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SECTION 11 PLAN ADMINISTRATION

11.1 Establishment of Committee

The Plan shall be administered by the Company. A Committee established by the Company, which as of May 8, 2006 is the US Savings Plan Investment Committee, shall be responsible for the duties described in subsection 11.2 below.

11.2 Committee General Powers, Rights, and Duties

Except as otherwise specifically provided herein, and in addition to the powers, rights and duties specifically given to the Committee elsewhere in the Plan or otherwise delegated to the Committee by the Company or the Compensation and Management Development Committee, the Committee shall have the full power and authority for the establishment of an investment policy for the Plan, and the selection, monitoring, and termination of notional investment options for the Plan, and such other powers, rights and duties as may be described from time to time in the Committee’s Charter. Except as otherwise specifically provided herein, and in addition to the powers, rights and duties specifically given to the Company elsewhere in the Plan, the Company shall have the following powers, rights and duties, which shall be exercisable in the sole discretion of the Company:

(a)

To adopt such rules, procedures, and regulations as in its opinion may be necessary for the proper and efficient administration of the Plan and as are consistent with the Plan and to change, alter, or amend such rules, procedures, and regulations;

(b)

To construe and interpret the provisions of the Plan and make factual determinations thereunder;

(c)

To determine all questions arising in the administration of the Plan, including the power to determine the rights or eligibility of Employees or Participants or any other persons, and the amounts of their benefits (if any) under the Plan, and to remedy ambiguities, inconsistencies, or omissions, and any such determination shall be binding on all parties;

(d)

To employ and suitably compensate such agents, attorneys, accountants, actuaries, recordkeepers, or other persons (who also may be employed by the Company) to render advice and perform other services as the Company may deem necessary to carry out its powers, rights, and duties;

(e)

To the extent applicable, to direct payments or distributions in accordance with the provisions of the Plan;

(f)

To furnish the Employers with such information as may be required by them for tax or other purposes in connection with the Plan;

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(g)

To communicate the Plan and its requirements to Participants;

(h)

To take such actions as the Company may deem necessary or advisable to correct any errors in the operation of the Plan; and

(i)

To take such other actions as the Company may deem necessary for the proper administration and operation of the Plan in accordance with its terms.

11.3 Interested Committee Member

No member of the Committee who is also an Employee of an Employer shall be excluded from participating in the Plan if otherwise eligible. If a member of the Committee (or one of its delegatees or designees) also is a Participant in the Plan, he may not decide or determine any matter or question concerning distributions of any kind to be made to him or her or the nature or mode of settlement of his benefits unless such decision or determination could be made by him or her under the Plan if he were not serving on the Committee.

11.4 Compensation and Expenses

Unless paid by an Employer, all reasonable costs, charges, and expenses incurred in the administration of this Plan, including expenses incurred by the Committee, compensation to an investment manager, and any compensation to agents, attorneys, actuaries, accountants, recordkeepers, and other persons performing services on behalf of this Plan or for the Committee, may be drawn from (a) Participants’ Accounts, in the form of a flat fee or a percentage of the value of each Account, (b) notional earnings or gains in each Investment Fund, or (c) an account maintained under a trust related to the Plan (if any).

11.5 Information Required by Company

Each person entitled to benefits under the Plan must file with the Company from time to time in writing such person’s mailing address and each change of mailing address. Any communication, statement, or notice addressed to any person at the last mailing address filed with the Company will be binding upon such person for all purposes of the Plan. Each person entitled to benefits under the Plan also shall furnish the Company with such documents, evidence, data, or information as the Company considers necessary or desirable for the purposes of administering the Plan. The Employers shall furnish the Company with such data and information as the Company may deem necessary or desirable in order to administer the Plan. The records of the Employers as to an Employee’s or Participant’s period of employment or membership on the Board, termination of employment or membership and the reason therefor, leave of absence, reemployment, and Compensation will be conclusive on all persons unless determined to the Company’s satisfaction to be incorrect.

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11.6 Uniform Application of Rules

The Company shall administer the Plan on a reasonable basis. Any rules, procedures, or regulations established by the Company shall be applied uniformly to all persons similarly situated.

11.7 Review of Benefit Determinations

Claims for benefits under the Plan shall be administered in accordance with Section 503 of ERISA, the regulations thereunder, and such reasonable claims procedures as may be established by the Company. The Plan shall provide adequate notice to any Participant, Spouse, Beneficiary, or other claimant whose claim for benefits under the Plan has been denied, setting forth the reasons for such denial, and shall afford such claimant a reasonable opportunity for a full and fair review. After exhaustion of the Plan’s claim procedures, any further legal action taken against the Plan or its fiduciaries by the Participant, Spouse, or Beneficiary (or other claimant) for benefits under the Plan must be filed in a court of law no later than 120 days after the Company’s final decision regarding the claim. No action at law or in equity shall be brought to recover benefits under this Plan until the appeal rights herein provided have been exercised and the Plan benefits requested in such appeal have been denied in whole or in part. All decisions and communications to Participants, Spouses, Beneficiaries, or other persons regarding a claim for benefits under the Plan shall be held strictly confidential by the Participant, Spouse, or Beneficiary (or other claimant), and the Company, the Employers, and their agents.

11.8 Company’s Decision Final

Benefits under the Plan will be paid only if the Company decides in its sole discretion that a Participant or Beneficiary (or other claimant) is entitled to them. Subject to applicable law, any interpretation of the provisions of the Plan and any decisions on any matter within the discretion of the Company made by the Company or its delegate in good faith shall be binding on all persons. A misstatement or other mistake of fact shall be corrected when it becomes known and the Company shall make such adjustment on account thereof as it considers equitable and practicable.

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SECTION 12 AMENDMENT AND TERMINATION

While the Company expects and intends to continue the Plan, the Company reserves the right to amend the Plan at any time and for any reason, including the right to amend this Section 12 and the Plan termination rules herein; provided, however, that each Participant will be entitled to the amount credited to his Accounts immediately prior to such amendment . The Company’s power to amend the Plan includes (without limitation) the power to change the Plan provisions regarding eligibility, contributions, notional investments, vesting, and distribution forms, and timing of payments, including changes applicable to benefits accrued prior to the effective date of any such amendment; provided, however, that amendments to the Plan (other than amendments relating to Plan termination) shall not cause the Plan to provide for acceleration of distributions in violation of Section 409A of the Code and applicable regulations thereunder

The Company reserves the right to terminate the Plan at any time and for any reason; provided, however, that each Participant will be entitled to the amount credited to his Accounts immediately prior to such termination (but such Accounts shall not be adjusted for future notional income, losses, expenses, appreciation and depreciation).

In the event that the Plan is terminated pursuant to this Section 12, the balances in affected Participants’ Accounts shall be distributed at the time and in the manner set forth in Section 9. Notwithstanding the foregoing, the Company reserves the right to make all such distributions within the second twelve-month period commencing with the date of termination of the Plan; provided, however, that no such distribution will be made during the first twelve-month period following such date of Plan termination other than those that would otherwise be payable under Section 9 absent the termination of the Plan.

IN WITNESS WHEREOF, the Company has signed this Plan document, as amended and restated effective as of September 1, 2011


The GAP, Inc

By:		/s/ Ken Kennedy
		Ken Kennedy
Title: Vice President of Global Compensation, Benefits and Mobility

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APPENDIX A

Merger of

The Gap, Inc. Executive Deferred Compensation Plan

into

Gap Inc. Deferred Compensation Plan

(prior to June 30, 2009, known as the Gap Inc. Supplemental Deferred Compensation Plan)

A-1. Introduction . The Gap, Inc. (the “Company”) maintains The Gap, Inc. Executive Deferred Compensation Plan (the “EDCP”) for the benefit of certain of its eligible employees. As of the close of business on June 30, 2009 (the “Merger Date”), the EDCP shall be merged into and continued in the form of this Plan.

A-2. Purpose . The purpose of this Appendix A is to set forth special provisions which will apply under the Plan on and after June 30, 2009 to reflect the merger and resulting transfer of notional accounts of participants in the EDCP into the Plan on the Merger Date. The Plan is designed to comply with the American Jobs Creation Act of 2004, as amended (the “Jobs Act”), and section 409A of the Code. The Plan is intended to conform to the requirements of the Jobs Act and section 409A of the Code, and final Treasury Regulations issued thereunder, with respect to Non-Grandfathered amounts under the Plan. It is intended that the provisions of the Plan relating to the amounts merged into the Plan from the EDCP be interpreted for periods prior to January 1, 2009 according to a good faith interpretation of the Jobs Act and section 409A of the Code, and consistent with published guidance thereunder, including, without limitation, IRS Notice 2005-1 and the proposed and final Treasury Regulations under section 409A of the Code. Treatment of amounts deferred under the Plan pursuant to and in accordance with any transition rules provided under all IRS published guidance and other applicable authorities in connection with the Jobs Act or section 409A of the Code, shall be expressly authorized hereunder and shall be administered in accordance with procedures established by the Company. In the event of any inconsistency between the terms of the Plan and the Jobs Act or section 409A of the Code with respect to Non-Grandfathered amounts, the terms of the Jobs Act and section 409A of the Code shall prevail and govern. “Grandfathered Amounts” shall mean the portion of the participant’s account balance under the EDCP as of December 31, 2004, the right to which was earned and vested (within the meaning of Treasury Regulation §1.409A-6(a)(2)) as of December 31, 2004, plus the right to future contributions to the account the right to which was earned and vested (within the meaning of Treasury Regulation. §1.409A-6(a)(2)) as of December 31, 2004, to the extent such contributions are actually made, each determined by reference to the terms of the EDCP in effect as of October 3, 2004, but only to the extent such EDCP terms have not been materially modified (within the meaning of Treasury Regulation §1.409A-6(a)(4)) after October 3, 2004. Grandfathered Amounts shall include any earnings (within the meaning of Treasury Regulation. §1.409A-1(o)) attributable thereto. “Non-Grandfathered Amounts” shall mean the Participant’s Account balance under the Plan less any portion of the Participant’s Account balance under the Plan constituting Grandfathered Amounts.

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A-3. Participation in the Plan . Each employee of the Company who, immediately prior to the Merger Date, was a participant with an account under the EDCP (an “Appendix A Participant”) became a Participant with an Account under the Plan effective as of the Merger Date, in accordance with the provisions of the Plan, as described in paragraph A-4 below.

A-4. Prior Accounts . Notional amounts credited to the notional accounts maintained under the EDCP for Appendix A Participants, as adjusted as of the Merger Date in accordance with the terms of the EDCP ( the “Prior Accounts”), will be credited to this Plan as of the Merger Date, and shall be notionally invested in the corresponding Investment Funds under this Plan to the extent determined by the Investment Committee and, at the discretion of the Investment Committee, as directed by the Appendix A Participant. Notwithstanding the foregoing, “Grandfathered Amounts” shall be held in separate “Grandfathered Accounts” and subaccounts to the extent deemed necessary and desirable by the Company.

A-5. Termination Date . The Termination Date with respect to an Appendix A Participant applicable to an Appendix A Participant’s Grandfathered Amounts shall be the date on which the Appendix A Participant ceases to perform services with the Company and any affiliate.

A-6. Former Participants . Former participants in the EDCP who terminated employment prior to the Merger Date but have not received payment in full of their vested Prior Account balances by that date shall have their remaining Prior Account balances maintained under the Plan. Such former participants in the EDCP with Prior Account balances under the Plan (or, in case of their death, their beneficiaries) may direct the notional investment of their Accounts pursuant to the provisions of the Plan until such Accounts are paid out in full and only for this purpose shall be treated as a “Participant” or a “Beneficiary”, as the case may be, under the Plan. Until payment in full is made, the Prior Account balances shall be adjusted pursuant to the terms of the Plan.

A-7. Manner of Distribution . The elections made by participants under the EDCP with respect to the manner of distribution of their Prior Account balances, plus notional appreciation, income, and earnings and minus notional depreciation and losses thereon (“Adjusted Prior Account Balances”) shall continue to apply to Adjusted Prior Account Balances of Appendix A Participants under this Plan on and after the Merger Date. Upon the Participant’s Termination date, the unvested portion of such Account shall be permanently forfeited.

A-8. In-Service Withdrawals . With respect to Grandfathered Amounts, the Company, in its sole discretion and notwithstanding any contrary provision of the Plan, may determine that all or part of the Appendix A Participant’s vested Prior Account shall be paid to him or her immediately as an in-service withdrawal; provided, however, that an amount equal to ten percent of the total amount of the in-service withdrawal shall be withheld by the Company and permanently forfeited. Appendix A Participants shall be limited to one in-service withdrawal per Plan Year.

A-9. Timing of Distributions . Adjusted Prior Account Balances of Appendix A Participants shall be distributed pursuant to the terms of this Plan. Notwithstanding the

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foregoing, with respect to Grandfathered Amounts, distributions shall be made as soon as practicable following an Appendix A Participant’s Termination Date. Installment payments shall be made as soon as practicable following an Appendix A Participant’s Retirement date (age 50) or death, with respect to Grandfathered Amounts. Payments made pursuant to an in-service distribution election with respect to Grandfathered Amounts shall be made on or before the last working day of April of the plan year in which such payment was elected to be made. Within the specific time periods described in this Appendix A, the Company shall have sole discretion to determine the specific timing of the payment of any Grandfathered Amounts under the Plan. The provisions of subsection 5.4 of the Plan shall apply only to Non-Grandfathered Amounts for Appendix A Participants.

A-10. Use of Terms . Terms used in this Appendix A with respect to the Plan shall, unless defined in this Appendix A, have the meanings of those terms as defined in the Plan. All of the terms and provisions of the Plan shall apply to this Appendix A.

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Exhibit 31.1

CERTIFICATIONS

I, Glenn K. Murphy, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of The Gap, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 7, 2011

/s/ Glenn K. Murphy

Glenn K. Murphy

Chairman and Chief Executive Officer

(Principal Executive Officer)

Exhibit 31.2

CERTIFICATIONS

I, Sabrina L. Simmons, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of The Gap, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(a)

(b)

(c)

(d)

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a)

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 7, 2011

/s/ Sabrina L. Simmons

Sabrina L. Simmons

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Exhibit 32.1

Certification of the Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of The Gap, Inc. (the “Company”) on Form 10-Q for the period ended October 29, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Glenn Murphy, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Glenn K. Murphy

Glenn K. Murphy

Chairman and Chief Executive Officer

Date: December 7, 2011

Exhibit 32.2

Certification of the Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of The Gap, Inc. (the “Company”) on Form 10-Q for the period ended October 29, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sabrina L. Simmons, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Sabrina L. Simmons

Sabrina L. Simmons

Executive Vice President and Chief Financial Officer

Date: December 7, 2011

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