Gap shares dropped in extended trading Thursday after the company warned that rising tariffs will significantly affect its profits moving forward.
When Gap last reported earnings in May, it projected tariffs would cost between $100 million and $150 million on a net basis. On Thursday, the company updated its estimate, saying the impact is now expected to reach $150 million to $175 million.
The company also revised its full-year operating margin forecast to 6.7%–7%, down from 7.4% last fiscal year. The decline reflects a tariff impact of 1–1.1 percentage points. For the current quarter, Gap expects gross margins to fall 1.5–1.7 percentage points due to tariff-related costs.
Mixed Fiscal Second-Quarter Performance
Beyond tariffs, Gap delivered mixed results in its fiscal second quarter. Analysts surveyed by LSEG had the following expectations:
- Earnings per share (EPS): 55 cents expected vs. 57 cents reported
- Revenue: $3.74 billion expected vs. $3.73 billion reported
Gap’s net income for the quarter ending Aug. 2 reached $216 million, or 57 cents per share, up from $206 million, or 54 cents per share, a year earlier. Total sales rose slightly to $3.73 billion from $3.72 billion. However, comparable sales increased only 1%, below analysts’ projected 1.9%.
While Old Navy, Banana Republic, and Gap itself posted gains in comparable sales, Athleta lagged, with a 9% decline.
“Clearly, Athleta is a powerful brand in the activewear space, but we’re disappointed in the quarter,” CEO Richard Dickson told CNBC. “We’ve been focusing on attracting new customers but didn’t offer enough for our core audience. This year is a reset for us.”
Read More: White House Ousts CDC Director Monarez; Four Senior Health Officials Resign
Leadership Changes at Athleta
In July, Gap named Maggie Gauger, a veteran from Nike, as Athleta’s new CEO. She is the third top executive to lead the brand in the past two years. The company hopes her leadership will reverse Athleta’s sales slump and reconnect with its core consumer.
Outlook and Growth Strategy
Gap reaffirmed its fiscal 2025 net sales growth guidance of 1%–2%, aligning with analyst expectations of 1.6%. For the current quarter, it expects 1.5%–2.5% revenue growth, slightly above the 2% analysts projected.
To mitigate tariff pressures, Gap is adjusting sourcing, diversifying its supply chain, working closely with suppliers, and implementing targeted price increases. The company said tariff annualization is not expected to reduce operating income further in 2026.
“We’re making targeted pricing adjustments while maintaining the right value proposition for consumers,” Dickson said. “Our goal is to sustain momentum and market share gains with the strategies that are working.”
Brand Performance Highlights
Just over two years into Dickson’s tenure as CEO, Gap has seen six consecutive quarters of comparable sales growth and holds a $2.2 billion cash reserve. Its brands are regaining cultural relevance.
Marketing and Pop Culture Relevance
Gap’s recent “Better in Denim” campaign, featuring Katseye and Kelis’s 2003 hit Milkshake, has been a standout success. The campaign achieved 20 million views in three days, 400 million total views, and 8 billion impressions, becoming the No. 1 search trend on TikTok.
Dickson emphasized Gap’s transformation from a heavily promotional retailer to a pop culture brand that shapes trends and drives strong merchandising initiatives.
Individual Brand Performance
- Old Navy: Sales reached $2.2 billion, up 1% from last year. Comparable sales grew 2%, slightly below the 2.2% analysts expected.
- Gap: The flagship banner posted $772 million in sales, up 1%, with comparable sales up 4% for the seventh consecutive quarter of growth.
- Banana Republic: Sales fell 1% to $475 million, but comparable sales rose 4%, significantly exceeding the expected 0.2% increase.
- Athleta: Sales dropped 11% to $300 million, with comparable sales down 9%. The new CEO aims to revitalize the brand and focus on its core consumer base.
Challenges and Opportunities
Gap’s gross margin for the quarter was 41.2%, below the 41.9% expected. Despite this, the company continues to make strides in its turnaround plan, emphasizing competitive positioning in the denim and apparel markets. The brand faces strong competition from Levi’s, American Eagle, and other major players, especially as consumers become more selective in discretionary spending.
As Gap executes its strategies in marketing, merchandising, and supply chain management, Wall Street’s expectations remain high. The company’s ability to balance tariff pressures, brand growth, and cultural relevance will be critical for sustaining long-term success.
Frequently Asked Questions
Why did Gap’s stock fall recently?
Gap’s stock declined in extended trading after the company warned that rising tariffs would impact its profits. The updated tariff costs are now expected to reach $150–175 million, higher than the previous estimate of $100–150 million.
What is Gap doing to counter tariff impacts?
Gap is working with suppliers, diversifying its supply chain, adjusting sourcing, and implementing targeted price increases. The company does not expect tariffs to reduce operating income further in 2026.
Who is leading Athleta, and what are the plans for the brand?
Maggie Gauger, a Nike veteran, has been appointed as Athleta’s new CEO. The goal is to reverse the brand’s sales slump and refocus on its core customer base.
What is Gap’s outlook for fiscal 2025?
Gap expects net sales growth of 1–2%, in line with analyst estimates of 1.6%. For the current quarter, it projects sales growth of 1.5–2.5%, slightly above the 2% expected by analysts.
How is Gap staying relevant in pop culture?
Gap’s recent “Better in Denim” campaign has been highly successful, generating 400 million views and 8 billion impressions. The campaign highlights Gap’s shift from a promotional retailer to a culturally influential brand, driving both merchandising and marketing initiatives.
Conclusion
Gap is navigating a challenging retail environment, balancing tariff pressures with efforts to drive growth across its portfolio of brands. While Athleta’s performance highlights areas for improvement, strong results from Old Navy, Gap, and Banana Republic demonstrate the company’s resilience. Strategic initiatives such as supply chain diversification, targeted pricing adjustments, and culturally relevant marketing campaigns position Gap to maintain momentum and strengthen its market presence.
