Gap Inc. Q2 Earnings: Old Navy Slump Counterbalanced by Tariff Adjustments and Brand Strength
In the fiscal second quarter, Gap Inc. (NYSE: GPS) reported net sales of $3.65 billion, slightly missing Wall Street estimates of $3.69 billion. Despite the top-line miss, adjusted earnings per share reached 52 cents, outperforming the 48-cent consensus. The earnings beat was propelled by a strong performance at the namesake Gap banner and a $512 million tariff refund, even as persistent traffic declines at the Old Navy division dragged down overall metrics.
The Bottom Line
- Earnings Beat: Adjusted EPS hit 52 cents against a 48-cent consensus, while GAAP net income reached $501 million ($1.38 per share), bolstered by a $512 million tariff refund.
- Old Navy Drag: Old Navy net sales fell 4% year-over-year to $2.1 billion, with comparable sales dropping 4% due to mismanaged seasonal merchandise and unexpected traffic slowdowns.
- Guidance Shift: Gap narrowed its full-year net sales growth outlook to a range of 1% to 1.5% while hiking its adjusted EPS range to between $2.35 and $2.45.
Decoding the Old Navy Misstep and Leadership Pivot
The primary anchor on Gap (NYSE: GPS) during the quarter was its largest revenue driver, Old Navy, which contributes nearly 60% of total corporate revenue. Old Navy posted net sales of $2.1 billion, a 4% decline year-over-year. Comparable sales fell 4%, reversing a 2% growth metric from the same period last year and missing StreetAccount expectations of a milder 2.4% contraction.
According to CEO Richard Dickson, the culprit was flawed seasonal execution. “Ultimately, our slight miss on total company was really due to Old Navy’s seasonal product assortment,” Dickson stated, noting that summer marketing initiatives lacked a clear product message. To arrest the slide, the company announced that Michael Francis, who took over as chief customer officer in May, will step in as Old Navy CEO effective November 2.
Current Old Navy CEO Haio Barbeito, who has held the post since 2022, will transition to an advisory role. Following the announcement, shares of Gap (NYSE: GPS) jumped 12% in extended trading on Thursday.
| Metric | Q2 Actual | Wall Street Consensus |
|---|---|---|
| Adjusted Earnings Per Share | 52 cents adjusted | 48 cents expected |
| Total Revenue | $3.65 billion | $3.69 billion |
| Gap Brand Comparable Sales | +10% | +8.6% |
| Old Navy Net Sales | $2.1 billion (-4% YoY) | -2.4% (comp decline) |
| Banana Republic Comp Sales | +3% | +2% |
Brand-Level Divergence: The Gap Banner Shines While Athleta Struggles
While Old Navy struggled, the rest of the portfolio displayed stark operational divergence. The namesake Gap banner emerged as the standout performer, with comparable sales surging 10%—comfortably beating analyst projections of 8.6% growth. Net sales for the banner rose 9% to $844 million, driven by targeted storytelling across denim, fleece, and children’s wear.
Banana Republic also registered modest gains, with comparable sales up 3% and net sales reaching $478 million, edging past the consensus estimate of 2%. Conversely, activewear brand Athleta faced severe headwinds, recording a 12% drop in comparable sales and pulling net sales down to $264 million. Management noted that Athleta remains committed to disciplined execution to rebuild profitability.
Here is the math on overall profitability: Gap reported a net income of $501 million, or $1.38 per share, compared to $216 million, or 57 cents per share, in the prior-year period. A massive driver of this bottom-line expansion was $95 million in tariff refunds received during the quarter, contributing to an 11.4-percentage-point gross margin benefit. Absent this one-time tariff impact, core gross margin improved by 0.2% year-over-year.
Forward Guidance and Macroeconomic Resilience
Reflecting the ongoing stabilization at Old Navy and the firmer footing of the core brand, Gap adjusted its full-year financial framework. The company narrowed its net sales growth expectations from a prior range of 1% to 2% down to 1% to 1.5%. Simultaneously, management raised its adjusted diluted earnings per share guidance from a band of $2.30 to $2.40 up to $2.35 to $2.45.
Dickson pointed to a consumer base that remains resilient yet discerning across all income cohorts. With seasonal missteps behind the company and executive leadership realigned at its core banner, Gap (NYSE: GPS) aims to convert sequential traffic improvements into sustained top-line growth through the back half of the fiscal year.
Disclaimer: The information provided in this article is for educational and informational purposes only and does not constitute financial advice.
