Question:Objectives

Locate specific financial accounting information in the Gap Inc. (Gap) 2016 Annual Report.

Calculate various financial ratios and interpret.

Gain a better understanding of the financial aspects of Gaps retail business.

Instructions

1.Locate Gap Inc.s 2016 Annual Report which has been posted to Blackboard with these instructions.

2.There are 10 sections of questions.You will find the information necessary to answer the questions in Item 8. Financial Statements and Supplementary Data, of the report.Read through the questions carefully and answer in the space provided.

Section 1.Balance Sheet - Overview

1.What are the following amounts at 1/30/17:

a.TotalAssets__________________

b.TotalLiabilities__________________

c.TotalOwners Equity__________________

2.At 1/30/17:

a.What is the percentage ofdebtused to finance Gap?____________

b.What is the percentage ofowners equityused to finance Gap?____________

c.What is the significance of these two percentages?________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

3.At 1/30/17:

a.What percentage of Gaps total assets arecurrent assets?__________

b.What percentage of Gaps total assets arenoncurrent assets?__________

c.Comment on whether this makes sense when you consider Gaps line of business.________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Section 2.Income Statement - Overview

1.Is Gaps income statement presented in a single-step or multiple-step format?_____________________

Why do you think that format was used?________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

2.What are the following amounts for the year ended 1/30/17:

a.Net Sales____________

b.Cost of Goods Sold____________

c.Gross Margin____________

d.Gross Margin Percentage____________

e.Operating Income____________

f.Net Income____________

Section 3.Cash Flow Statement - Overview

1.What are the following amounts for the year ended 1/30/17:

a.Cash flows fromoperating activities_______________

b.Cash flows frominvesting activities_______________

c.Cash flows fromfinancing activities_______________

Section 4.Current Assets

1.What is the amount ofCurrent Assetsat 1/30/17?_______________

2.What is the amount ofInventoriesat 1/30/17?_______________

a.What valuation principle does Gap use to value these inventories?

________________________________________________________________________

b.Which cost flow assumption does Gap use to determine the cost of inventories?

________________________________________________________________________

Section 5.Noncurrent Assets

1.What is the amount ofNoncurrent Assetsat 1/30/17?_______________

2.What is the amount ofProperty and Equipment(net) held by Gap at 1/30/17?_______________

a.How much depreciation has been recorded on these assets at 1/30/17?_______________

b.What method does Gap use to calculate depreciation?_______________________

3.What is the amount of Furniture and Equipment held by Gap at 1/30/17?_______________

Section 6.Current Liabilities

1.What is the amount ofCurrent Liabilitiesat 1/30/17?_______________

2.What are the following amounts for the year ended 1/30/17:

a.Accounts Payable_______________

b.Current ratio_______________

Section 7.Noncurrent Liabilities

1.What is the amount ofNoncurrent Liabilitiesat 1/30/17?_______________

2.How much of Gaps long-term debt will become due and payable in less than 1 year?______________

Section 8.Shareholders Equity

1.At 1/30/17:

How many shares ofcommon stockare:(a) authorized_______________

(b) issued_______________

(c) outstanding _______________

How many shares ofpreferred stockare:(a) authorized_______________

(b) issued_______________

(c) outstanding _______________

2.What was the amount of dividends paid to shareholders during 2016?_______________

Section 9.Other Information

Locate the following information in the Gap 2016 Annual Report:

a.Name of Gaps CEO__________________

b.Name of Gaps CFO__________________

c.Stock symbol on the New York Stock Exchange (NYSE)___________________

d.Independent accountants (auditors)_________________________

Section 10.Recent Financial News

Search for a recent news article about Gap (within the past year) that discusses a topic which hasfinancialimplications to the company.Prepare abriefsummary of the article (reference article here) and explain the importance or significance of this information to Gaps financial statements.

2016 ANNUAL REPORT GAPINC.COM 170252_L01_CVRS.indd 1 3/17/17 7:45 PM BOARD OF DIRECTORS LEADERSHIP TEAM C O R P O R AT E AND SHAREHOLDER I N F O R M AT I O N Domenico De Sole, 73 (*) Director since 2004. Chairman of Tom Ford International, a luxury retailer. Former President and Chief Executive Ofcer of Gucci Group NV. Chairman of Sotheby's. Director of Newell Rubbermaid, Inc. (Not standing for reelection at the May 2017 Annual Meeting of Shareholders.) Art Peck Director, and President and CEO, Gap Inc. Gap Inc. Investor Relations Please see the Investors tab on www.gapinc.com 2 Folsom Street San Francisco, CA 94105 415-427-0100 investor_relations@gap.com Robert J. Fisher, 62 (+) Non-Executive Chairman. Director since 1990. Managing Director of Pisces, Inc., an investment group. Former Interim Chief Executive Ofcer and executive of the company. William S. Fisher, 59 Director since 2009. Founder and Chief Executive Ofcer of Manzanita Capital Limited, a private equity fund. Former executive of the company. Teri List-Stoll EVP and Chief Financial Ofcer Sonia Syngal President and CEO, Old Navy Jeff Kirwan President and CEO, Gap Nancy Green President and CEO, Athleta Jyothi Rao President and General Manager, Intermix Tracy Gardner, 53 Director since 2015. Principal of Tracy Gardner Consultancy. Former Chief Executive Ofcer of dELiA*s Inc., an omni-channel retail company primarily marketing to teenage girls. Former executive of the company. Paul Chapman EVP and Chief Information Ofcer Brian Goldner, 53 (*) Director since 2016. Chairman, President, and Chief Executive Ofcer of Hasbro, Inc. Former Executive Vice President and Chief Operating Ofcer of Bandai America. Julie Gruber EVP, Global General Counsel, Corporate Secretary and Chief Compliance Ofcer Isabella D. Goren, 56 (^) Director since 2011. Former Chief Financial Ofcer of AMR Corporation and American Airlines, Inc. Director of Lyondell Basell Industries N.V. and MassMutual Financial Group. Bob L. Martin, 68 (* +) Director since 2002. Operating Partner of Stephens Group, Inc., a private equity group. Chief Executive Ofcer (part-time) of Mcon Management Services, Ltd., a consulting company. Former President and Chief Executive Ofcer of Wal-Mart International. Director of Conn's, Inc. Sebastian DiGrande EVP, Strategy and Chief Customer Ofcer Abinta Malik EVP and General Manager, Greater China Bobbi Silten EVP, Global Talent and Sustainability Michael Yee EVP, Global Supply Chain: Sourcing and Production Shawn Curran EVP, Global Supply Chain: Logistics and Product Operations Stock Exchange Listing Trading Symbol \"GPS\" / New York Stock Exchange Annual Shareholders' Meeting May 17, 2017, 10:00 a.m. Pacic Time Gap Inc. Headquarters 2 Folsom Street San Francisco, CA 94105 Independent Registered Public Accounting Firm Deloitte & Touche LLP San Francisco, CA Registrar and Transfer Agent (For registered shareholders) Wells Fargo Bank, N.A. Shareowner Services 1110 Centre Pointe Curve, Suite 101 Mendota Heights, MN 55120 Benecial Shareholders (Shares held by your broker in the name of the brokerage house) Direct questions to your broker. Fiscal 2017 Earnings Release Dates Please visit www.gapinc.com for up-to-date information about earnings release dates. Live audio of each quarterly earnings conference call can be accessed through the Investors page of our website at www.gapinc.com the day of the earnings release. Replays are available for approximately 90 days following the event. Jorge P. Montoya, 70 (^) Director since 2004. Former executive of The Procter & Gamble Company. Director of The Kroger Co. Art Peck, 61 Director since 2015. President and Chief Executive Ofcer, Gap Inc. Mayo A. Shattuck III, 62 (+ ^) Director since 2002. Non-Executive Chairman of Exelon Corporation, an energy company. Former Chairman, Chief Executive Ofcer and President of Constellation Energy Group. Director of Capital One Financial Corporation and Alarm.com Holdings, Inc. Katherine Tsang, 59 (*) Director since 2010. Principal of Max Giant Limited, an investment company. Former Chairperson of Greater China, Standard Chartered Bank, Standard Chartered Bank (Taiwan) Limited, Standard Chartered Bank (Hong Kong) Limited. Former Chief Executive Ofcer of Standard Chartered Bank (China) Limited. Doris F. Fisher Honorary Lifetime Director since 2009. Former Director and merchandiser of the company. Cofounder of the company with her husband Donald G. Fisher, who passed away in September 2009. P R I N T I N G C O N S I D E R AT I O N S The Gap Inc. 2016 Annual Report was printed by an environmentally sustainable printer, which utilizes 100 percent renewable wind power and sustainable manufacturing principles including: socially responsible procurement; green chemistry principles; reduced VOC inks and coatings; recycling of residual materials; and carbon reduction strategies supporting forest carbon offset initiatives. Printed on FSC-certied Finch paper supporting responsible forestry. (*) Compensation and Management Development Committee (+) Governance and Sustainability Committee (^) Audit and Finance Committee 170252_L01_CVRS.indd 2 3/20/17 4:51 PM UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended January 28, 2017 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 (State of Incorporation) 94-1697231 (I.R.S. Employer Identification No.) Two Folsom Street, San Francisco, California (Address of principal executive offices) 94105 (Zip code) Registrant's telephone number, including area code: (415) 427-0100 Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.05 par value (Title of class) The New York Stock Exchange (Name of exchange where registered) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No 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 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 the definitions of \"large accelerated filer,\" \"accelerated filer\" and \"smaller reporting company\" in Rule 12b-2 of the Exchange Act: Large accelerated filer 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 Act). Yes No The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of July 29, 2016 was approximately $6 billion based upon the last price reported for such date in the NYSE-Composite transactions. The number of shares of the registrant's common stock outstanding as of March 14, 2017 was 399,843,485. Documents Incorporated by Reference Portions of the registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on May 17, 2017 (hereinafter referred to as the \"2017 Proxy Statement\") are incorporated into Part III. Special Note on Forward-Looking Statements This Annual Report on Form 10-K 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,\" \"intend,\" \"plan,\" \"project,\" and similar expressions also identify forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding the following: target cash balance and ability to provide for our working capital needs and for unexpected business downturns; the impact of foreign exchange rate fluctuations in fiscal 2017; the impact of store closures and streamlining measures, including annualized savings; the recovery of remaining costs related to the Fishkill distribution center fire; attracting, retaining, and training great talent in our businesses and functions; continuing our investment in customer experience both in stores and online; net store openings in fiscal 2017; the impact of continuing depreciation of certain foreign currencies on gross margin in fiscal 2017; current cash balances and cash flows being sufficient to support our business operations, including growth initiatives, planned capital expenditures, dividend payments, and repayment of debt; ability to supplement near-term liquidity, if necessary, with our $500 million revolving credit facility or other available market instruments; the impact of the seasonality of our operations; cash spending for purchases of property and equipment in fiscal 2017, including costs related to rebuilding the Fishkill, New York distribution center campus; dividend payments in fiscal 2017; share repurchases in fiscal 2017; the estimates and assumptions we use in our accounting policies; the impact of accounting pronouncements; unrealized gains and losses from designated cash flow hedges; total gross unrecognized tax benefits; the impact of losses due to indemnification obligations; the outcome of proceedings, lawsuits, disputes, and claims; and the impact of changes in internal control over financial reporting. 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 we or our franchisees will be unsuccessful in gauging apparel trends and changing consumer preferences; the highly competitive nature of our business in the United States and internationally; the risk that failure to maintain, enhance and protect our brand image could have an adverse effect on our results of operations; the risk that the failure to attract and retain key personnel, or effectively manage succession, could have an adverse impact on our results of operations; the risk that trade matters could increase the cost or reduce the supply of apparel available to us and adversely affect our business, financial condition, and results of operations; the risk that changes in the regulatory or administrative landscape could adversely affect our financial condition, strategies, and results of operations; the risk that our investments in omni-channel shopping initiatives may not deliver the results we anticipate; the risk that if we are unable to manage our inventory effectively, our gross margins will be adversely affected; the risk that we are subject to data or other security breaches that may result in increased costs, violations of law, significant legal and financial exposure, and a loss of confidence in our security measures, which could have an adverse effect on our results of operations and our reputation; the risk that foreign currency exchange rate fluctuations could adversely impact our financial results; the risks to our business, including our costs and supply chain, associated with global sourcing and manufacturing; the risk that changes in global economic conditions or consumer spending patterns could adversely impact our results of operations; the risks to our efforts to expand internationally, including our ability to operate under a global brand structure and operating in regions where we have less experience; the risks to our reputation or operations associated with importing merchandise from foreign countries, including failure of our vendors to adhere to our Code of Vendor Conduct; the risk that our franchisees' operation of franchise stores is not directly within our control and could impair the value of our brands; 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 changes in our credit profile or deterioration in market conditions may limit our access to the capital markets and adversely impact our financial position or our business initiatives; the risk that updates or changes to our information technology (\"IT\") systems may disrupt our operations; the risk that natural disasters, public health crises, political crises, or other catastrophic events could adversely affect our operations and financial results, or those of our franchisees or vendors; the risk that reductions in income and cash flow from our marketing and servicing arrangement related to our private label and co-branded credit cards could adversely affect our operating results and cash flows; the risk that the adoption of new accounting pronouncements will impact future results; the risk that we do not repurchase some or all of the shares we anticipate purchasing pursuant to our repurchase program; 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 this Annual Report on Form 10-K and our other filings with the U.S. Securities and Exchange Commission (\"SEC\"). Future economic and industry trends that could potentially impact net sales and profitability are difficult to predict. These forward-looking statements are based on information as of March 20, 2017, 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. THE GAP, INC. 2016 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS Page PART I Item 1. Business 1 Item 1A. Risk Factors 5 Item 1B. Unresolved Staff Comments 12 Item 2. Properties 12 Item 3. Legal Proceedings 12 Item 4. Mine Safety Disclosures 12 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 13 Item 6. Selected Financial Data 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 31 Item 8. Financial Statements and Supplementary Data 33 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 74 Item 9A. Controls and Procedures 74 Item 9B. Other Information 74 PART III Item 10. Directors, Executive Officers and Corporate Governance 74 Item 11. Executive Compensation 74 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 75 Item 13. Certain Relationships and Related Transactions, and Director Independence 75 Item 14. Principal Accounting Fees and Services 75 PART IV Item 15. Exhibits, Financial Statement Schedules 76 [THIS PAGE INTENTIONALLY LEFT BLANK] Part I Item 1. Business. General The Gap, Inc. (Gap Inc., the \"Company,\" \"we,\" and \"our\") was incorporated in the State of California in July 1969 and was reincorporated under the laws of the State of Delaware in May 1988. Gap Inc. is a leading global apparel retail company. We offer apparel, accessories, and personal care products for men, women, and children under the Gap, Banana Republic, Old Navy, Athleta, and Intermix brands. Our portfolio of distinct brands across multiple channels and geographies, combined with our size and scale which allows for strategic and advantageous partnerships with our third-party vendors and suppliers throughout the organization, gives us a competitive advantage in the global retail marketplace. In December 2016, the Company acquired Weddington Way, which does not have a material impact on our Consolidated Financial Statements. Gap Inc. is an omni-channel retailer, with sales to customers both in stores and online, through Company-operated and franchise stores, websites, and third-party arrangements. Gap Inc. has Company-operated stores in the United States, Canada, the United Kingdom, France, Ireland, Japan, Italy, China, Hong Kong, Taiwan, and Mexico. We also have franchise agreements with unaffiliated franchisees to operate Gap, Banana Republic, and Old Navy stores throughout Asia, Australia, Europe, Latin America, the Middle East, and Africa. Under these agreements, third parties operate, or will operate, stores that sell apparel and related products under our brand names. 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, especially at our Intermix brand. Gap Inc. is a leader among apparel retailers in using omni-channel capabilities to bridge the digital world and physical stores, creating world-class shopping experiences regardless of where or how our customers shop. The Company's suite of omni-channel services, including order-in-store, reserve-in-store, find-in-store, and ship-fromstore, as well as enhanced mobile experiences, are uniquely tailored across its portfolio of brands. Gap. Gap is one of the world's most iconic apparel and accessories brands anchored in optimistic, casual, American style. Founded in San Francisco in 1969, the brand's collections continue to build the foundation of modern wardrobes - all things denim, tees, button-downs, and khakis, along with must-have trends. Gap is designed to build the foundation of modern wardrobes through every stage of life with apparel and accessories for adult men and women under the Gap name, in addition to GapKids, babyGap, GapMaternity, GapBody, and GapFit collections. Beginning in 1987 with the opening of the first store outside North America in London, Gap continues to connect with customers around the world through specialty stores, online, and franchise stores. In addition, we bring the brand to value-conscious customers, with exclusively designed collections for Gap Outlet and Gap Factory stores and websites. Banana Republic. Acquired with two stores in 1983 as a travel and adventure outfitter, Banana Republic is now a global apparel and accessories brand focused on delivering versatile, contemporary classics, designed for today with style that endures. Banana Republic offers clothing and accessories with detailed craftsmanship and luxurious materials. Customers can purchase Banana Republic products globally in our specialty and Banana Republic Factory stores, online, and in franchise stores. Old Navy. Old Navy is a global apparel and accessories brand that believes in the democracy of style, making high quality, must-have fashion essentials for the whole family, while delivering incredible value, and fun, unique store experiences. Old Navy opened its first store in 1994 in the United States and since has expanded its international presence with Company-operated stores in Canada, China, and Mexico, as well as franchise stores in seven countries. Customers can purchase Old Navy products globally in Company-operated and franchise stores and online. 1 Athleta. Athleta is a premium fitness and lifestyle brand creating versatile performance apparel to inspire a community of active, confident women and girls. Established in 1998 and acquired by Gap Inc. in 2008, Athleta integrates technical features and innovative design across its women's collection to carry her through a life in motion, from yoga, training and sports, to everyday activities and travel. In 2016, the company launched Athleta Girl, mirroring its signature performance in styles for the next generation. Customers can purchase Athleta products in the United States through its stores and catalogs, or globally through its website. Intermix. Acquired in December 2012, Intermix curates must-have styles from the most coveted emerging and established designers. Known for styling on-trend pieces in unexpected ways, Intermix delivers a unique point of view and an individualized approach to shopping and personal style. Customers can shop in stores in the United States and Canada, and online. Weddington Way. Acquired in December 2016, Weddington Way is a social shopping platform for wedding parties, featuring an online boutique with exclusive bridesmaid dresses and a curated selection of wedding party gifts. Customers can shop Weddington Way online, and the brand ships globally. Piperlime. Launched in 2006, Piperlime offered a mix of private label and branded apparel and accessories. The Company closed the Piperlime brand during the first half of fiscal 2015. Sales to customers are tendered for cash, debit cards, credit cards, or personal checks. We also issue and redeem gift cards through our brands. Gap, Banana Republic, Old Navy, and Athleta each have a private label credit card program and a co-branded credit card program through which frequent customers receive benefits. Private label and co-branded credit cards are provided by a third-party financing company, with associated revenue sharing arrangements reflected in Gap Inc. operations. The range of merchandise displayed in each store varies depending on the selling season and the size and location of the store. Stores are generally open seven days per week (where permitted by law) and most holidays. We ended fiscal 2016 with 3,200 Company-operated stores and 459 franchise store locations. For more information on the number of stores by brand and region, see the table in \"Management's Discussion and Analysis of Financial Condition and Results of Operations\" included in Item 7 of this Form 10-K. Certain financial information about international operations is set forth under the heading "Segment Information" in Note 17 of Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K. Merchandise Vendors We purchase private label and non-private label merchandise from about 800 vendors. Our vendors have factories in about 40 countries. Our two largest vendors each accounted for about 5 percent of the dollar amount of our total fiscal 2016 purchases. Of our merchandise purchased during fiscal 2016, substantially all purchases, by dollar value, were from factories outside the United States. Approximately 25 percent and 23 percent of our fiscal 2016 purchases, by dollar value, were from factories in Vietnam and China, respectively. Product cost increases or events causing disruption of imports from Vietnam, China, or other foreign countries, including the imposition of additional import restrictions or taxes, or vendors potentially failing due to political, financial, or regulatory issues, could have an adverse effect on our operations. Substantially all of our foreign purchases of merchandise are negotiated and paid for in U.S. dollars. Also see the sections entitled \"Risk FactorsOur business is subject to risks associated with global sourcing and manufacturing," "Risk FactorsRisks associated with importing merchandise from foreign countries, including failure of our vendors to adhere to our Code of Vendor Conduct, could harm our business,\" and \"Risk FactorsTrade matters may disrupt our supply chain\" in Item 1A of this Form 10-K. Seasonal Business Our business follows a seasonal pattern, with sales peaking during the end-of-year holiday period. 2 Brand Building Our ability to develop and evolve our existing brands is a key to our success. We believe our distinct brands are among our most important assets. With the exception of Intermix, virtually all aspects of brand development, from product design and distribution to marketing, merchandising and shopping environments, are controlled by Gap Inc. employees. With respect to Intermix, we control all aspects of brand development except for product design related to third-party products. We continue to invest in our business and enhance the customer experience through significant investments in our supply chain and omni-channel capabilities, investments in marketing, enhancement of our online shopping sites, remodeling of existing stores, and international expansion. Trademarks and Service Marks Gap, GapKids, babyGap, GapMaternity, GapBody, GapFit, Banana Republic, Old Navy, Athleta, and Intermix trademarks and service marks, and certain other trademarks, have been registered, or are the subject of pending trademark applications, with the United States Patent and Trademark Office and with the registries of many foreign countries and/or are protected by common law. Franchising We have franchise agreements with unaffiliated franchisees to operate Gap, Banana Republic, and Old Navy stores in a number of countries throughout Asia, Australia, Europe, Latin America, the Middle East, and Africa. Under these agreements, third parties operate, or will operate, stores that sell apparel and related products under our brand names. For additional information on risks related to our franchise business, see the sections entitled \"Risk FactorsOur efforts to expand internationally may not be successful\" and \"Risk FactorsOur franchise business is subject to certain risks not directly within our control that could impair the value of our brands\" in Item 1A of this Form 10-K. Inventory The nature of the retail business requires us to carry a significant amount of inventory, especially prior to the peak holiday selling season when we, along with other retailers, generally build up inventory levels. We maintain a large part of our inventory in distribution centers. We review our inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes or colors) and we primarily use promotions and markdowns to clear merchandise. Also see the sections entitled \"Risk FactorsWe must successfully gauge apparel trends and changing consumer preferences to succeed\