GAP INC (GAP)·Q2 2026 Earnings Summary

Executive Summary

• EPS beat but slight top-line miss: Diluted EPS $0.57 vs $0.55 consensus* (beat), revenue $3.73B vs $3.73B consensus* (slight miss); operating margin 7.8% despite 140 bps gross margin headwind from credit card lapping and Athleta discounting . Q2 estimates from S&P Global: EPS $0.549*, Revenue $3.7329B*.
• Mix and brand momentum: Positive comps for 6th straight quarter (+1%); Old Navy (+2%), Gap (+4%), Banana Republic (+4%) offset Athleta (-9%); online +3% to 34% of sales .
• Guidance: FY25 net sales growth reaffirmed at +1–2%; added FY25 operating margin range 6.7–7.0% (includes 100–110 bps tariff impact); capex lowered to $500–$550mm (from ~$600mm prior); Q3 outlook: net sales +1.5–2.5%, GM deleverage 150–170 bps with ~200 bps tariff impact .
• Catalysts and risk: Clear tariff mitigation plan (sourcing/pricing/mix) and back-to-school strength at Old Navy/Gap; Athleta reset and tariff headwinds remain near-term swing factors .

What Went Well and What Went Wrong

• What Went Well

  • Portfolio strength and comps: “We delivered operating margin of 7.8%, EPS of $0.57 up 6%… with positive comps for the sixth consecutive quarter,” CEO Richard Dickson; Old Navy and Gap led, Banana Republic improving .
  • Category leadership: Old Navy denim posted “highest volume second quarter in ten years” and is “number four brand in adult denim”; active positioned as “number five brand in the active category” .
  • Marketing/brand heat: Gap’s “Better in Denim” activation generated 20M views in first three days; management emphasized stronger marketing effectiveness while “spending less and being more effective” .

• What Went Wrong

  • Gross margin pressure: GM 41.2%, down 140 bps YoY, mainly lapping prior credit card benefit and Athleta discounting to clear product; GM below internal expectations due to Athleta reset .
  • Athleta underperformance: Net sales -11%, comps -9%; management flagged assortment misalignment and heavier markdowns; new CEO appointed to drive reset .
  • Tariff headwinds: FY25 operating margin guide includes ~100–110 bps tariff drag; Q3 GM expected to deleverage ~150–170 bps with ~200 bps tariff impact .

Financial Results

Notes: Q2 2026 corresponds to quarter ended Aug 2, 2025. Calculated margins for Q2 2025 derived from Net Sales and Gross Profit/Operating Income disclosed in cited documents.

Segment net sales (current vs prior year):

Comparable sales (YoY):

KPIs and mix:

• Online sales +3% YoY; 34% of total net sales .
• Store sales -1% YoY .
• Inventory $2.3B, +9% YoY (accelerated receipts, higher tariff cost) .
• Cash, cash equivalents & ST investments $2.4B (+13% YoY); FCF $127mm (non-GAAP); capex $181mm; 3mm shares repurchased ($82mm); quarterly dividend $0.165/share .

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• CEO Richard Dickson: “We delivered operating margin of 7.8%, EPS of $0.57… with positive comps for the sixth consecutive quarter… it’s clear our strategy is working” .
• On Old Navy and Gap: “Old Navy’s denim posted the highest volume second quarter in ten years… Gap denim had a standout quarter… ‘Better in Denim’ generated 20 million views in the first three days” .
• CFO Katrina O’Connell: “We are reiterating our fiscal 2025 outlook of net sales up 1% to 2%… expect operating margin of 6.7% to 7%… including an estimated net impact of approximately 100 to 110 bps” .
• On Athleta: “Gross margin was below our expectations due to incremental actions taken in support of the reset at Athleta” .

Q&A Highlights

• Tariffs and guidance: FY25 OM guide now embeds $150–$175mm tariff impact (~100–110 bps); absent tariffs, OM and GM would expand YoY; management does not expect further operating income declines in 2026 from tariff annualization given mitigation .
• Pricing strategy: Targeted pricing one of several levers (mix, full-price sell-through, promotions, inventory); maintain overall value proposition .
• AUR and collabs: Gap AUR up even excluding collaborations; playbook (big product + cultural storytelling) driving sustained comps .
• Marketing efficiency: Stronger results on lower spend; improved media mix and creator-led content .
• Athleta margin drag: Merchandise margin decline vs plan tied to deeper discounting at Athleta to clear weak product acceptance .

Estimates Context

• Q2 2026 vs consensus: EPS $0.57 vs $0.549* (beat); Revenue $3.725B vs $3.733B* (slight miss). Primary EPS (12 ests), Revenue (11 ests)*.
• Q3 2026 consensus: EPS $0.588*, Revenue $3.904B*; company guides Q3 net sales +1.5–2.5% vs $3.8B base (implies ~$3.86–$3.90B), broadly in-line with consensus; GM deleverage expected on tariffs . Values with asterisks retrieved from S&P Global (Capital IQ consensus).

Key Takeaways for Investors

• Portfolio engine is working: Old Navy, Gap, and Banana Republic comps offset Athleta; EPS beat showcases earnings power even with tariffs; expect continued category-led momentum into back-to-school/holiday .
• Near-term margin headwinds are tariff-driven and transitory per management; mitigation (sourcing/pricing/mix) and AUR tailwinds should support OM expansion beyond FY25 .
• Capex tempered ($500–$550mm) while still funding tech/AI and brand reinvigoration; cash/LIQ $2.4B gives flexibility for investments and buybacks/dividends .
• Athleta is the swing factor: reset and new leadership could unlock recovery, but discounting pressure may persist near term; watch early product/marketing changes under the new CEO .
• Trading setup: Momentum at Gap/Old Navy and Q3 sales guide support near-term top-line; tariff narrative and Athleta progress likely to drive multiple; EPS estimate revisions should bias modestly upward on the beat, but GM expectations for Q3 may cap near-term optimism .