The Gap's 2025Q2-2026Q2 Earnings Calls: Contradictions on Tariff Impact, Margins, and Revenue Drivers

The above is the analysis of the conflicting points in this earnings call

Date of Call: August 29, 2025

Financials Results

• Revenue: $3.7B, flat YOY
• EPS: $0.57 per diluted share, up 6% YOY (vs $0.54 prior year)
• Gross Margin: 41.2%, down 140 bps YOY (lapped prior-year credit card benefit)
• Operating Margin: 7.8%, down 10 bps YOY

Guidance:

• FY25 net sales expected up 1%–2% YOY; strength at Old Navy, Gap, Banana; longer Athleta recovery.
• FY25 operating margin expected at 6.7%–7%, including $150–$175M tariff impact (~100–110 bps).
• FY25 gross margin to deleverage ~70–90 bps YOY, driven by tariffs (~100–110 bps).
• FY25 SG&A to leverage slightly; ~$150M cost savings with reinvestment.
• FY25 capex: $500–$550M.
• Q3 net sales expected up 1.5%–2.5% YOY; back-to-school strong at Old Navy and Gap.
• Q3 gross margin to deleverage ~150–170 bps YOY (tariffs ~200 bps).
• Q3 slight SG&A deleverage; inventory units below sales; 2026 tariffs not expected to further reduce operating income.

Business Commentary:

• Revenue and Comparable Sales Performance:
• Gap Inc. reported flat net sales for Q2 2025, with comparable sales up 1%.
• The growth was driven by strong performance at Old Navy, Gap, and Banana Republic, which offset challenges at Athleta.

• The strategic focus on brand reinvigoration and product portfolio optimization contributed to this performance.

• Brand-Specific Growth:

• Old Navy's net sales were $2.2 billion, up 1% year-over-year, with comparable sales up 2%.
• The growth was attributed to disciplined execution, strategic category focus in denim and active, and effective storytelling.
• Gap's net sales of $772 million rose 1%, with comparable sales up 4%, marking the seventh consecutive quarter of positive comps.

• The brand's momentum was driven by consistent product focus, culturally relevant storytelling, and successful brand collaborations.

• Operational Efficiency and Financial Discipline:

• Gap achieved an operating margin of 7.8% and EPS of $0.57, up 6% compared to the prior year.
• The improvements were the result of financial and operational rigor, gross margin expansion, and effective cost management.

• The company maintained a strong cash balance of approximately $2.4 billion, enabling targeted investments in capabilities and brands.

• Tariff Impact and Mitigation Strategies:

• Gap Inc. cited an estimated net tariff impact of $150 million to $175 million for 2025, equating to approximately 100 to 110 basis points of operating margin.
• The company has been actively pursuing mitigation strategies, including adjustments to sourcing, manufacturing, and pricing.
• Despite tariff pressures, the company reaffirmed its net sales outlook of up 1% to 2% for the year.
• The strategic focus on brand reinvigoration and operational efficiency provides confidence in sustaining momentum despite external challenges.

Sentiment Analysis:

• Management beat profit expectations and achieved top-line goals, with EPS up 6% YOY and comps up 1%. They reaffirmed FY25 net sales growth of 1%–2%. However, gross margin contracted 140 bps YOY and Athleta underperformed. Outlook includes tariff headwinds: FY25 gross margin deleverage and operating margin guided to 6.7%–7% due to $150–$175M tariffs.

Q&A:

• Question from Alexandra Ann Straton (Morgan Stanley): Why lower full-year EBIT/EPS despite Q2 outperformance? Is it mostly tariffs, and what differs vs peers’ mitigation?
  Response: Guidance reflects strong execution but now includes $150–$175M tariff headwind (~100–110 bps OM); excluding tariffs, gross and operating margins would expand; teams are mitigating and still expect FY25 sales up 1%–2%.

• Question from Alexandra Ann Straton (Morgan Stanley): Is double-digit operating margin still possible over time?
  Response: Long-term OM improvement remains the goal; with tariff mitigation and the playbook working, management sees a path to higher margins over time.

• Question from Marni Shapiro (The Retail Tracker): At Old Navy, is better in-store execution due to higher spending or merchandising changes?
  Response: No increase in spend; improved efficiency and disciplined merchandising (category shops, denim/active focus) are driving results.

• Question from Marni Shapiro (The Retail Tracker): Is Gap’s higher AUR driven mainly by collaborations, or is core AUR up too?
  Response: Core AUR is up even without collabs; growth stems from the reinvigoration playbook—big product ideas and compelling storytelling—with collabs adding excitement.

• Question from Brooke Siler Roach (Goldman Sachs): Confidence in cycling tougher Gap compares into holiday and actions to sustain the 2-year stack?
  Response: Confidence comes from consistent playbook execution; the ‘Better in Denim’ campaign is generating record engagement, reinforcing Gap’s cultural relevance and supporting continued momentum.

• Question from Matthew Robert Boss (JPMorgan): What drives Q3 sales acceleration to 1.5%–2.5% and how are August trends? Any constraints to margin expansion in 2026 given tariffs?
  Response: Back-to-school is strong, especially at Old Navy and Gap, supporting Q3 growth; teams’ mitigation plans mean tariffs shouldn’t further reduce operating income in 2026, allowing margin improvement potential.

• Question from Lorraine Corrine Maikis Hutchinson (BofA Securities): How is pricing used to mitigate tariffs, and why won’t second-half pressure continue into next year?
  Response: Pricing is targeted and portfolio-based to maintain value; with clearer timing/scale, management is deploying balanced mitigation (sourcing, assortments, pricing) so 2026 won’t see further tariff-driven declines.

• Question from Dana Lauren Telsey (Telsey Advisory Group): What were comp drivers (traffic/ticket)? How is back-half marketing spend evolving, and any update on Banana leadership?
  Response: Traffic was healthy; AUR up on stronger full-price selling (offset by Athleta discounting). Marketing is more effective with less spend via improved creative and media mix. Banana progress continues; leadership search ongoing.

• Question from Irwin Bernard Boruchow (Wells Fargo): Please parse Q2 merchandise margin down ~150 bps vs prior guidance; how much was credit card vs Athleta weakness?
  Response: About 80–90 bps was the lapped credit-card benefit; the remainder was Athleta’s deeper discounting to clear weaker product, while other brands performed well.