GPS Q2 2026: 7th Straight Comps, Lowers FY Guide on $150M Tariff Drag
- Strong Brand Reinvigoration: Gap’s brands have consistently delivered positive comparable sales—with Gap recording its seventh consecutive quarter of positive comps and Old Navy showing strong momentum through campaigns like “Better in Denim” (which delivered 20,000,000 views in three days)—highlighting robust consumer engagement and cultural relevance.
- Effective Tariff Mitigation and Margin Discipline: Management noted that despite an estimated 100–110 basis point tariff impact this year, without such pressures the company would have achieved underlying margin expansion. Their proactive, disciplined approach to pricing and cost management supports potential operating margin improvements over time.
- Enhanced Operational Efficiency: The firm is driving higher average unit retail (AUR) and revenue growth through improved merchandising and a more efficient, data-driven marketing spend—delivering better results without increased outlays, thereby reinforcing sustainable growth prospects.
- Tariff Headwinds: The management highlighted an updated tariff impact of 100-110 basis points on operating margin, which remains a significant headwind that could pressure margins if mitigation efforts fall short.
- Athleta Underperformance: Athleta’s poor results—with deep discounting needed to clear unsold inventory—raise concerns about its ability to recover and contribute positively, potentially dragging down overall performance.
- Worsening Margin Pressure: The merchandise margin decline of 150 basis points (worse than the forecasted 80 basis points)—attributed partly to credit card lapping and Athleta’s discounting—suggests challenges in cost control that could adversely affect profitability.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +8% YoY [N/A] | Robust segment performance and operational improvements drove revenue growth. In previous periods, Q1 2025 revenue grew by $112 million—largely fueled by increased U.S. sales (from $2,841M to $2,989M) and strong Old Navy Global performance —while Q1 2026 saw a further 2% increase due to sustained comparable sales growth and operational efficiencies. |
North America | +10% YoY [N/A] | Solid domestic performance, particularly in the U.S., underpinned growth in this region. Earlier data showed U.S. sales accounting for about 88% of total sales along with positive comparable sales across all brands, aligning with the continual gains and operating margin expansion seen over previous periods. |
International Markets | -2% YoY [N/A] | A modest contraction in international markets points to regional challenges and market saturation. Prior period data indicated stable performance in Canada but declines in other regions (for example, Other Regions dropped from $183M to $141M in Q1 2025), suggesting similar pressures might persist. |
Online Sales | +12% YoY [N/A] | Accelerated digital growth reflects targeted e-commerce investments and platform enhancements. The trend follows earlier periods where online sales increased from $1,223M in Q1 2024 to $1,282M in Q1 2025 and further to $1,356M in Q1 2026, reinforcing the company’s effective digital strategy. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Net Sales | FY 2025 | 1% to 2% increase | 1% to 2% increase | no change |
Gross Margin | FY 2025 | Expected to expand slightly | Decrease by approximately 70 to 90 basis points | lowered |
SG&A | FY 2025 | Expected to leverage slightly | Slight leverage | no change |
Capital Expenditures | FY 2025 | $600 million | $500 million to $550 million | lowered |
Operating Margin | FY 2025 | no prior guidance | 6.7% to 7% | no prior guidance |
Net Sales | Q3 FY 2025 | roughly flat year-over-year | 1.5% to 2.5% increase | raised |
Gross Margin | Q3 FY 2025 | Similar to Q1 2025 gross margin (41.8%), implying a decline | Decrease by approximately 150 to 170 basis points | lowered |
SG&A | Q3 FY 2025 | Expected to leverage slightly | Slight deleverage | lowered |
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Tariff Impact
Q: Why lower guidance despite strong quarter?
A: Management explained that while Q2 results were solid, they lowered full‐year guidance due to an updated $150–175M tariff impact (roughly 100–110bps) that weighed on margins, noting that without these headwinds, margins would have expanded. -
Pricing Mitigation
Q: Why won’t tariff pressure extend to next year?
A: They emphasized that proactive cost management, disciplined pricing strategies, and timely mitigation efforts will fully offset future tariff pressures, ensuring no additional margin drag next year. -
Margin Potential
Q: Can margins reach double digits eventually?
A: Management reiterated that excluding current tariff effects, the company’s robust execution and strategic initiatives are positioned to drive long‐term operating margin improvements, potentially reaching higher levels over time. -
Holiday Comparables
Q: What supports healthy holiday comparables for Gap?
A: Leaders pointed to Gap’s consistent performance – with seven consecutive quarters of positive comps – supported by strong product storytelling and cultural relevance that should carry into the holiday season. -
Gross Margin Decline
Q: What drove a 150bps gross margin drop?
A: They attributed roughly 80–90bps of the decline to credit card lapping and cited additional drag from aggressive discounting at Athleta, which hurt overall gross margin performance. -
Revenue Acceleration
Q: What fuels Q3’s expected 2% revenue growth?
A: Management highlighted stronger performance across key brands – notably Old Navy and Gap – along with renewed back-to-school momentum, driving an anticipated revenue acceleration of 2% in Q3. -
AUR Performance
Q: Is Gap’s higher AUR solely from collaborations?
A: They clarified that the uptick in AUR is rooted in the strong execution of their overall strategy and improved product mix, not just from high-profile collaborations. -
Marketing Effectiveness
Q: How is marketing enhancing comp growth?
A: Management noted that a refined creative approach and optimized media mix are delivering effective, lower-cost consumer engagement, thereby boosting comps—especially evident in Banana Republic’s progress. -
In-Store Merchandising
Q: Are increased store spends driving Old Navy results?
A: They confirmed that performance improvements at Old Navy are due to enhanced merchandising and execution rather than higher in-store spending, reflecting a more efficient retail model.
Research analysts covering GAP.