Executive Summary

Q2 FY2025 delivered in-line top line and a modest EPS beat: revenue of $3.73B was flat YoY (vs. $3.72B prior-year) while diluted EPS of $0.57 exceeded third-party consensus of $0.55; gross margin contracted 140 bps to 41.2% on lapping credit-card revenue-sharing benefits, partially offset by ROD leverage. Guidance reaffirmed for FY net sales but operating margin was reset lower to incorporate tariff headwinds .
Mix and brand performance were constructive: comps positive for the 6th consecutive quarter; Old Navy, Gap, and Banana Republic posted positive comps, while Athleta remained soft; online grew 3% to 34% of sales .
FY25 outlook: net sales growth 1%–2% reaffirmed; operating margin set to 6.7%–7.0% including ~100–110 bps net tariff impact; Q3 guide implies gross margin deleverage of ~150–170 bps including ~200 bps tariff impact; capex cut to $500–$550M (from ~$600M at Q1) .
Stock reaction: shares fell ~2.8% in regular trading and rebounded ~0.9% after-hours on print; catalysts included the EPS beat versus estimates offset by tariff-driven margin headwinds in guidance .

What Went Well and What Went Wrong

What Went Well
- Positive comps for the 6th straight quarter; Old Navy +2%, Gap +4%, Banana Republic +4% comps; management reiterated the brand reinvigoration playbook is working. CEO: “overdelivered on profit expectations and achieved our topline goals… it’s clear our strategy is working.” .
- Operating discipline: OpEx held to ~$1.24B with operating income of $292M and 7.8% margin; ROD leveraged 10 bps YoY .
- Strong cash/returns: $2.4B cash/short-term investments (+13% YoY), $127M FCF, $82M buybacks, $0.165 dividend maintained; 371M shares outstanding .
What Went Wrong
- Gross margin down 140 bps to 41.2% on lapping elevated credit-card revenue-sharing benefit; merchandise margin -150 bps YoY .
- Athleta continued to lag: net sales -11%, comps -9%; management characterizes 2025 as a “reset year” for Athleta .
- Q3 margin guide soft: expects ~150–170 bps gross margin deleverage with ~200 bps tariff impact; inventory +9% YoY on accelerated receipts and higher costs tied to tariffs, a watch item for 2H execution .

Financial Results

Metric	Q2 2024	Q1 2025	Q2 2025	Consensus (Q2 2025)
Revenue ($B)	$3.72	$3.46	$3.73	$3.73
Gross Margin %	42.6% (calc)	41.8%	41.2%	—
Operating Income ($M)	$293	$260	$292	—
Operating Margin %	7.9% (calc)	7.5%	7.8%	—
Net Income ($M)	$206	$193	$216	—
Diluted EPS ($)	$0.54	$0.51	$0.57	$0.55
Online Sales % of Sales	33% (calc based on prior year; NA explicitly)	39%	34%	—

Notes: Q2 2024 margin percentages are computed from reported financial statements; revenue and profit amounts are from the company’s 8‑K and press releases. Consensus reflects a third-party source because S&P Global data was unavailable via our tool.

Segment performance and comps:

Segment	Net Sales ($M)	YoY %	Comp Sales %
Old Navy	$2,200	+1%	+2%
Gap	$772	+1%	+4%
Banana Republic	$475	-1%	+4%
Athleta	$300	-11%	-9%
Gap Inc. (Total)	$3,725	~0%	+1%

Key KPIs and balance sheet/cash flow:

KPI	Q1 2025	Q2 2025
Cash, cash equivalents & ST investments ($B)	$2.2	$2.4
Inventory ($B)	$2.1	$2.3 (+9% YoY)
Free Cash Flow ($M)	-$223	$127
Capex ($M)	$83	$181
Company-operated stores (#)	2,496	2,486
Dividend per share ($)	0.165	0.165
Share repurchases ($M)	70	82
Online sales (% of sales)	39%	34%

Guidance Changes

Metric	Period	Previous Guidance (Q1 FY2025)	Current Guidance (Q2 FY2025)	Change
Net sales	FY2025	+1% to +2%	+1% to +2%	Maintained
Profitability metric	FY2025	Operating income +8% to +10% (excl. tariff impact)	Operating margin 6.7%–7.0% (incl. ~100–110 bps net tariff impact)	Reframed; lower margin outlook due to tariffs
Effective tax rate	FY2025	~26%	~27%	Raised
Capex	FY2025	~$600M	~$500–$550M	Lowered
Net interest income	FY2025	~+$15M	~+$15M	Maintained
Net store closures	FY2025	~35	~35	Maintained
Net sales	Q3 FY2025	—	+1.5% to +2.5% YoY	New quarterly outlook
Gross margin	Q3 FY2025	—	Deleverage ~150–170 bps incl. ~200 bps tariff impact	New; tariff headwind signaled
Operating expense	Q3 FY2025	—	Slight deleverage (timing of investments)	New quarterly outlook

Earnings Call Themes & Trends

Topic	Previous Mentions (Q4’24 and Q1’25)	Current Period (Q2’25)	Trend
Tariffs & mitigation	FY25 outlook provided; later previewed $100–$150M tariff impact in Q1 context; focus on cost control and “controlling the controllables”	Operating margin guided to 6.7%–7.0% incl. ~100–110 bps net tariff impact; Q3 gross margin deleverage guided due to ~200 bps tariffs; teams have “mitigated the majority” of the April impact .	Worsened near term; mitigation ongoing
Brand reinvigoration & product (Denim)	Q1: positive comps; “reinvigoration playbook” working across Gap and Old Navy	Gap denim strength (baggy/horseshoe/barrel/long & lean); Fall “Better in Denim” launch; sustained comps at Old Navy/Gap .	Improving momentum
Athleta reset	Q1: acknowledged softness; recovery to take time	Athleta -11% sales/-9% comps; 2025 framed as a “reset year”; assortment not aligned with customer expectations .	Still challenged
Digital/online mix	Q1: online 39% (+6% YoY)	Online +3%, 34% of sales (seasonal mix shift) .	Normalizing seasonally
Supply chain/cost discipline	Ongoing rigor, SG&A control, and cost savings underpinning margin gains	ROD leverage +10 bps; balanced macro stance; “performing while we transform” .	Stable
AUR/inventory approach	FY24: disciplined approach; Q1: controlled receipts	Inventory +9% YoY (accelerated receipts, tariff costs); CFO aims to drive AUR growth in 2H25 while balancing tariffs .	Mixed: higher inventory but targeted AUR plans

Management Commentary

CEO Richard Dickson: “Overdelivered on profit expectations and achieved our topline goals… With positive comps for the sixth consecutive quarter… it’s clear our strategy is working.” .
On product momentum: “Gap denim had a standout quarter… building on that strength, last week we launched our Fall release, Better in Denim… another example of consistent execution of our brand reinvigoration playbook.” .
On Athleta: “We’re disappointed in the second quarter performance… approaching 2025 as a purposeful reset year… the broader assortment simply isn’t aligned with what the Athleta customer expects.” .
CFO Katrina O’Connell: reiterated FY25 net sales +1%–2% and updated operating margin to 6.7%–7.0% including ~100–110 bps tariff impact; highlighted mitigation efforts and a balanced macro stance .

Q&A Highlights

Formal Q&A transcript was not available in the prepared remarks materials reviewed; key management clarifications emphasized tariff impact incorporation in guidance, continued mitigation, and a balanced macro view for 2H25 .
Management acknowledged Athleta’s longer recovery timeline and reinforced brand-specific reinvigoration playbooks (notably denim at Gap) as near-term traffic/AUR drivers .
Inventory positioning reflects accelerated receipts and tariff-related costs; teams aim to drive 2H AUR while managing unit costs and promotional discipline .

Estimates Context

Q2 FY2025 results vs consensus: EPS $0.57 vs $0.55 (beat); revenue $3.73B vs $3.73B (in-line) .
S&P Global consensus data was unavailable via our tool at this time; values above reflect a third-party source. If you prefer S&P Global, we can refresh once access is restored.

Key Takeaways for Investors

Mix resilience with selective brand strength: Old Navy/Gap/Banana Republic comp growth offset Athleta softness; execution of reinvigoration playbooks continues to support comps and AUR potential into 2H25 .
Tariffs are the swing factor: FY margin reset (6.7%–7.0%) and Q3 gross margin deleverage guide embed tariff impact; mitigation is ongoing and could be a source of upside if costs ease or offsets accelerate .
Healthy balance sheet and cash returns provide downside support: $2.4B cash/ST investments, ongoing dividend, and buybacks signal confidence and flexibility .
Near-term trading setup: Expect focus on Q3 gross margin print vs guidance and Athleta trajectory; any evidence of faster tariff mitigation or stronger denim/AUR performance could re-rate shares near-term .
Medium-term: Execution of brand reinvigoration and digital/customer experience initiatives, plus supply chain/SG&A discipline, underpin the case for sustained mid-single-digit operating margins post-tariffs .
Watch inventory and promotions into holiday: Inventory +9% YoY driven by accelerated receipts/tariff costs raises execution risk; promotional discipline will be key to protecting margin .
Guidance sensitivity: Capex lowered to $500–$550M signals prudence; FY sales intact but margins hinge on tariff cadence and mix—monitor updates at Q3 .

GAP INC (GPS)·Q2 2025 Earnings Summary