GAP Q1 Earnings Call Highlights
Key Points
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- Gap delivered its ninth straight quarter of companywide comparable sales growth, with Q1 net sales up 1% to $3.5 billion and comparable sales up 2%. Adjusted EPS came in at $0.38 versus $0.51 a year ago, while gross margin was 40.5%, better than guidance despite tariff pressure.
- The Gap brand and Banana Republic were the portfolio bright spots, each posting solid comparable growth, while Old Navy slowed and Athleta remained weak. Gap brand comps rose 10% and Banana Republic comps rose 2%, but Old Navy was held back by seasonal categories and Athleta saw an 11% comp decline.
- Management lifted full-year adjusted EPS guidance but lowered sales expectations, now forecasting 1% to 2% net sales growth for fiscal 2026 and adjusted EPS of $2.30 to $2.40. The company also said tariff relief may help, but it is holding much of that benefit back for flexibility amid an uncertain promotional environment.
GAP (NYSE:GAP) reported first-quarter fiscal 2026 results that management said reflected continued progress in its turnaround, with companywide comparable sales rising for the ninth consecutive quarter, even as performance varied sharply across its portfolio of brands.
Chief Executive Officer Richard Dickson opened the call with a remembrance of co-founder Doris Fisher, calling her “a true original” whose legacy shaped the company’s role in fashion, retail, philanthropy and the San Francisco art scene.
For the quarter, net sales rose 1% year over year to $3.5 billion, while comparable sales increased 2%. Chief Financial Officer Katrina O’Connell said the gap between net sales and comparable sales largely reflected the company lapping revenue recognized last year related to the structure of its credit card agreement.
Gross margin was 40.5%, down 130 basis points from a year earlier but ahead of the company’s guidance. O’Connell said merchandise margin declined 100 basis points, including an expected roughly 200-basis-point headwind from tariffs, implying underlying merchandise margin expansion of about 100 basis points. Reported operating margin was 12.7%, while adjusted operating margin was 5.2%. Reported earnings per share were $0.90, and adjusted earnings per share were $0.38, compared with $0.51 a year earlier.
The company said adjusted results exclude a $313 million legal settlement net gain and a concurrent $50 million charitable donation recorded during the quarter.
Gap Brand Leads Portfolio With Double-Digit Comparable Growth
The Gap brand delivered the strongest performance in the quarter, with net sales up 10% to $796 million and comparable sales also rising 10%. Dickson said the brand posted its 10th consecutive quarter of positive comparable sales, supported by strength in women’s, consistency in men’s and a return to growth in kids and baby.
Management highlighted denim and fleece as key category drivers. Dickson said the “Sweats Like This” campaign featuring Young Miko generated nearly 1.5 billion press and social media impressions and resonated with Gen Z audiences. He also pointed to Gap’s Coachella “Hoodie House” activation, which sold roughly 10,000 custom hoodies and generated more than 300 million social media and press impressions.
The company plans to remodel about 30 Gap stores this year, bringing approximately 25% of the North America specialty fleet into the new concept by year-end. Gap is also preparing to relaunch fragrance this summer with heritage scents including Heaven and Grass, and plans to introduce an accessories collection in the fall.
Old Navy Growth Slows on Seasonal Weakness
Old Navy, the company’s largest brand, posted net sales of $2 billion, up 1% year over year, with comparable sales also up 1%. Dickson said the brand continued to gain traction in strategic categories including active, denim, and kids and baby, but results were pressured by weaker performance in women’s dresses and other seasonal categories.
“We are not seeing this as a consumer issue,” Dickson said during the question-and-answer session, adding that the company saw growth across low-, middle- and high-income customers. He said Old Navy “did not have the right fashion and value equation” in dresses and also saw weaker customer response in swim and shorts.
Management said the team has moved to sharpen price points and strengthen messaging to improve conversion in seasonal categories. Dickson said those changes began to show some improvement in mid-May, but the company is taking a more tempered view of Old Navy for the year.
Old Navy also announced Michael Francis as chief customer officer, a newly created role. Dickson said Francis will help sharpen customer strategy and bring more consistency to how the brand shows up across touchpoints and seasons. The brand is also rolling beauty out to its full store fleet by year-end and plans to launch a partnership with Fanatics tied to sports licensing.
Banana Republic Improves, Athleta Remains in Rebuild
Banana Republic reported net sales of $431 million, up 1%, with comparable sales increasing 2%. The quarter marked the brand’s fourth consecutive quarter of positive comparable sales. Dickson said both men’s and women’s performed well, with strength in pants and sweaters.
The company also named Donald Kohler president and CEO of Banana Republic. Dickson said Kohler’s career includes leadership roles at Calvin Klein, Tommy Hilfiger, Burberry, Ferragamo and Diesel, as well as more than a decade at Gap.
Athleta remained the weakest brand in the portfolio. Net sales fell 12% to $270 million, and comparable sales declined 11%. Dickson said 2026 is a rebuild year for Athleta, with the brand focused on clearing less productive legacy product and transitioning toward a cleaner assortment in the fall. He said newer products, including the Journey travel collection and new leg shapes in the Elation line, have generated encouraging early reads, though at a smaller scale.
Guidance Updated: Lower Sales, Higher EPS
Gap now expects full-year fiscal 2026 net sales growth of 1% to 2%, reflecting a moderated view of Old Navy. O’Connell said the company now expects Old Navy comparable sales to be flat to up 1% for the year. Gap brand comps are expected to be in the high single digits, while Banana Republic is expected to post another year of comparable growth. Athleta’s outlook reflects a slower rebuild, with second-quarter trends expected to be similar to the first quarter.
The company maintained its full-year adjusted operating margin outlook of 7.3% to 7.5%, compared with 7.3% last year. It raised its adjusted EPS outlook to $2.30 to $2.40, citing favorability from interest income, tax and share count.
For the second quarter, Gap expects net sales to be flat to down 1% year over year, with Old Navy comparable sales projected to decline in the low single digits. Gross margin is expected to be flat to down 50 basis points, while SG as a percentage of sales is expected to deleverage by approximately 110 to 120 basis points.
Tariffs, Cash Flow and Capital Returns
O’Connell said the company now expects approximately $80 million, or 50 basis points, of year-over-year net tariff relief relative to its prior outlook, based on lower tariff rates through July 24. However, she said Gap is reserving that benefit as flexibility, with roughly half serving as a buffer against elevated fuel costs and half reserved for potential pricing investments if the promotional environment intensifies.
The company is not including any potential tariff refunds in its outlook. O’Connell said Gap has line of sight to what it may be due but does not yet have certainty on timing or outcome.
Gap ended the quarter with $2.6 billion in cash equivalents and short-term investments, up 15% from a year earlier. Net cash from operating activities was $213 million, and free cash flow was $78 million. Inventory was flat year over year, with units down.
The company repurchased approximately $400 million of stock year to date, or about 16 million shares, and has about $600 million remaining under its current authorization. It also paid $63 million in dividends during the quarter, reflecting a 6% increase in the quarterly rate to $0.175 per share.
About GAP (NYSE:GAP)
Gap Inc is a global specialty retailer renowned for its portfolio of apparel and accessories brands, including Gap, Banana Republic, Old Navy and Athleta. The company designs, sources and markets clothing across a broad price range and style spectrum, catering to men, women and children. Its offerings extend from everyday wardrobe essentials such as denim, tees and outerwear to performance and lifestyle pieces, reflecting each brand's distinct identity and price point.
Founded in San Francisco in 1969 by Donald and Doris Fisher, Gap Inc has grown into one of the world's largest apparel companies.
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