Gap Beats Estimates and Raises Guidance, Shares Surge Nearly 14%

Gap, Inc. shares moved higher in premarket trading on Friday after the company reported second-quarter adjusted earnings per share that beat expectations and raised its fiscal 2026 EPS guidance above market consensus.

Adjusted EPS came in at 52 cents, surpassing the 48-cent consensus estimate, while revenue of $3.651 billion fell short of the $3.690 billion consensus.

Adjusted gross margin expanded 20 basis points to 41.4%, and adjusted merchandise margin increased 80 basis points, including a 30-basis-point benefit from tariff relief. However, adjusted operating margin declined 70 basis points to 7.1%.

The company paid $62 million in dividends during the quarter, and its board approved a third-quarter dividend of 17.5 cents per share.

The retailer also repurchased $200 million in stock, bringing year-to-date buybacks to over $600 million across 26 million shares. Approximately $400 million remains available under the current share repurchase authorization.

Gap ended the quarter with $2.5 billion in cash, cash equivalents, and short-term investments. Inventory at cost was flat year-over-year, but units increased 4%, primarily due to higher in-transit inventory related to geopolitical disruptions.

Comparable sales declined 1%. The Gap brand led the way, with net sales up 9% and comparable sales up 10%, marking its 11th consecutive quarter of positive growth, driven by denim, fleece, kids, and baby categories. The Hailey Jean collection with Hailey Bieber sold out quickly, while Gap also relaunched its fragrance line and plans to enter accessories through bags in September. Approximately 35 store remodels are expected in 2026.

Old Navy, Banana Republic

Gap appointed Michael Francis as President and CEO of Old Navy, effective November 2.

Old Navy comparable sales declined 4%, with women's summer categories contributing approximately 3 percentage points of pressure, particularly dresses, shorts, and swimwear, alongside soft traffic.

This seasonal drag is expected to ease in the third quarter, supported by denim, active, sweaters, and knitwear categories.

Old Navy Sport has approximately 40 shop-in-shops, expanded its partnership with Fanatics, and launched its Beauty Company Collection nationwide.

Meanwhile, Banana Republic comparable sales rose 3%, marking its fifth consecutive quarter of positive growth, with strong performance across men's and women's outerwear, sweaters, denim, and linen categories. Athleta remains under pressure, with sales and comparable sales both down 12%, but improved inventory efficiency through tighter inventory management and selective new product launches.

Outlook

Gap raised its fiscal 2026 adjusted EPS guidance from $2.30-$2.40 to $2.35-$2.45, above the $2.34 market estimate.

The company narrowed its fiscal 2026 revenue outlook from $15.520 billion-$15.670 billion to $15.554 billion-$15.631 billion, above the $15.531 billion market estimate.

For fiscal 2026:

Gap expects comparable sales to broadly align with overall sales growth; outlook raised to high-single-digit to low-double-digit growth.

Old Navy's full-year comparable sales forecast was lowered to flat to down 1%.

Banana Republic is expected to deliver another year of growth, with full-year comparable sales expected to grow in the low single digits.

Gap raised its fiscal 2026 adjusted gross margin outlook to slightly above last year's level, now expecting a modest tariff benefit.

The company is working toward $150 million in cost savings this fiscal year, with a portion offsetting inflation and the remainder funding growth initiatives.

The company extended its 10% tariff assumption through August, expecting approximately $15 million in incremental net tariff relief, primarily in the fourth quarter. If the rate persists into the third quarter, Gap estimates an additional $35 million benefit for the year.

For the third quarter, the company expects revenue of $3.958 billion to $3.998 billion, versus the $3.981 billion market estimate.

For the third quarter, Gap expects net sales growth of 1.5%-2.5%, with comparable sales down approximately 50 basis points. Old Navy comparable sales are expected to be flat to down 1%, improving from the 4% decline in the second quarter. Gross margin is expected to expand 25-75 basis points, with tariffs contributing approximately 150 basis points, including 50 basis points from the lower Section 122 rate, with the remainder from tariff relief measures.

GAP stock movement: In Friday premarket trading, Gap shares rose 13.85% to $23.67.