Shares in Gap (NYSE: GAP) slid 2% in overnight trading after the largest specialty apparel company in the United States missed sales expectations and warned that tariffs would have a greater impact on profits.
Sales rose to US$3.73 billion ($3.74 billion expected), up from US$3.72 billion the previous year, while same store sales were up 1%, well short of the 1.9% rise analysts were expecting.
While its full-year operating margin is expected to be between 6.7% and 7%, down from 7.4% in the previous year, the retailer also widened the expected tariff hit to between $150 million and $175 million, up from the previously expected $100 million and $150 million.
Meanwhile, within its current quarter, the retailer – best known for brands like Old Navy, Athleta, Banana Republic - expects its gross margin to be down between 1.5 and 1.7 percentage points, due to tariff costs.
While Gap is working with suppliers, adjusting its sourcing and diversifying its supply chain to offset the tariff impact, the company doesn’t expect the annualisation of tariffs to cause any further declines in operating income in 2026.
“As it relates to pricing, we’re making targeted adjustments with pricing, there isn’t anything that we’ve done that is substantially different,” said CEO Richard Dickson, who has delivered six straight quarters of same store sales growth since taking over as CEO two years ago.
“We focus on making sure that we’re presenting to our consumer the right value proposition and ultimately want to make even more sure that we’re sustaining the momentum and market share gains that our playbook has been performing.”
Over the last two years, Dickson is said to have orchestrated the retailer’s move from what was an overly promotional clothing retailer lacking a strong voice - from a merchandising perspective - to a pop culture brand that’s telling great stories, driving great merchandising initiatives.
“This is proving that Gap is a powerful pop culture brand, and this is also what our playbook looks like when you get it right,” he noted.
The company’s reported net income for the three-month period ending 2 August was $216 million, or 57 cents per share, compared with $206 million, or 54 cents per share, a year earlier.
While Gap, Banana Republic and Old Navy all saw same store sales rise during the quarter, Athleta dragged the company’s overall performance down with same store sales down 9%.
“Clearly, Athleta is a powerful brand in the active space, being the number five brand in the space, but we’re disappointed in the quarter,” said CEO Richard Dickson, who has tried to move the company away from its distinctive performance roots.
“We’ve paid a lot of attention, trying to court a new customer, and ultimately didn’t have enough offerings for our core customer. As we balance that out, we’ve been very transparent to say it’s a year of reset for us.”
During the quarter, its gross margin came in at 41.2%, behind expectations of 41.9%. Here’s a breakdown of the company's mixed brand performance:
- Old Navy: Gap’s largest and most important brand saw sales of $2.2 billion, up 1% compared with last year, while same store sales were up 2%.
- Gap: Net sales of $772 million were up 1% compared with last year, while comparable sales were up 4%.
- Banana Republic: The safari-chic, business essentials brand saw net sales of US$475 million, down 1% compared with last year, while same store sales were up 4%.
- Athleta: Sales of $300 million were down 11%, while same store sales were down 9%.
The Athleta brand’s latest CEO, longtime veteran of Nike, Maggie Gauger – the third CEO appointed to run the brand in the last two years - is charged with reversing the brand's slump and reconnecting with Athleta’s core consumer.
Meanwhile, Gap recently launched its “Better in Denim” campaign featuring Katseye and Kelis’s 2003 hit “Milkshake.”
Dickson said the campaign has been a standout success, delivering 20 million views in the first three days, 400 million total views and 8 billion impressions.
It’s also the No. 1 search on TikTok, Dickson said.
At the time of writing, Gap (NYSE: GAP) stock was trading at US$21.45, down 1.1% from Thursday's close of $12.68. Gap's market cap stands at US$8.09 billion.
