Gap's Q2 2025 Earnings Call: Contradictions Emerge on Tariff Impact, Marketing Efficiency, and Pricing Strategy

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 (company comps +1%)
• EPS: $0.57 per diluted share, up 6% YOY (vs $0.54 prior year)
• Gross Margin: 41.2%, down 140 bps YOY; up 360 bps vs two years ago
• Operating Margin: 7.8%, down 10 bps YOY

Guidance:

• FY2025 net sales expected up 1%–2% YOY.
• FY2025 gross margin to deleverage ~70–90 bps YOY, driven by net tariff impact of ~100–110 bps (higher-cost units begin flowing in Q3).
• FY2025 SG&A to leverage slightly.
• FY2025 operating margin expected ~6.7%–7.0%, including ~$150–$175M tariff impact (~100–110 bps).
• Q3 net sales expected up 1.5%–2.5% YOY.
• Q3 gross margin to deleverage ~150–170 bps YOY with ~200 bps tariff impact; slight SG&A deleverage.
• FY2025 capex now $500M–$550M.
• Do not expect 2026 annualized tariffs to cause further operating income declines; plan to mitigate fully over time.

Business Commentary:

* Strong Financial Performance and Brand Momentum: - Gap Inc. reported comparable sales up 1% in Q2, with its three largest brands, Old Navy, Gap, and Banana Republic, posting positive comps. - The company delivered an operating margin of 7.8%, EPS of $0.57, up 6% year-over-year, and ended the quarter with strong cash balances of approximately $2.4 billion. - This performance was attributed to maintaining financial and operational rigor, reinvigorating brands, and investing in technology.

• Brand Reinvigoration Success:
• Old Navy achieved a 2% comp on top of last year's 5%, posting its highest-volume denim quarter in 10 years.
• Gap's brand was reignited with a 4% comp, marking its seventh consecutive quarter of positive comps.

• The success was driven by strategic pursuits in key categories like denim and active, along with effective storytelling and marketing campaigns.

• Athleta's Reset and Leadership Change:

• Athleta's net sales decreased 11% year-over-year, but the company is undertaking a purposeful reset year focused on stabilizing and reviving the brand.
• Maggie Gauger, a veteran from Nike, was appointed as the new President and CEO of Athleta.

• The reset aims to realign the brand with customer expectations and drive product and marketing improvements over time.

• Tariff Impact and Mitigation Strategies:

• Gap Inc. anticipates an estimated net tariff impact of approximately $150 million to $175 million, equating to about 100 to 110 basis points of operating margin.
• The company is employing a balanced approach to mitigate tariff pressures, including adjustments in sourcing, manufacturing, and targeted pricing.
• The strategy aims to offset tariff impacts and maintain long-term profitability.

Sentiment Analysis:

• Management beat profit expectations and met top-line goals (EPS $0.57, up 6% YOY; comps +1%). They reaffirmed FY2025 net sales growth of 1%–2%, but lowered profit outlook due to tariffs: gross margin deleverage 70–90 bps and operating margin 6.7%–7.0%. Q3 outlook is stronger on revenue (up 1.5%–2.5% YOY) but calls for gross margin deleverage of 150–170 bps on ~200 bps tariff impact.

Q&A:

• Question from Alexandra Ann Straton (Morgan Stanley): You lowered full-year EBIT/EPS despite Q2 beat—primarily tariffs? How do tariff dynamics differ for you versus peers?
  Response: Guidance cut is driven by $150–$175M tariff impact (~100–110 bps to operating margin); ex-tariffs, gross and operating margins would expand, and mitigation plans are underway.

• Question from Alexandra Ann Straton (Morgan Stanley): Longer term, is double-digit operating margin still achievable?
  Response: They see long-term operating margin expansion potential, expect to fully mitigate tariffs over time, and aim for sustainable profitable growth.

• Question from Marni Shapiro (The Retail Tracker): At Old Navy, are better stores/marketing requiring higher spend, or is it merchandising? And at Gap, is AUR up excluding collabs?
  Response: Old Navy is not spending more; improved merchandising and more efficient marketing drive results. Gap’s AUR is up even excluding collaborations; momentum reflects the reinvigoration playbook.

• Question from Brooke Siler Roach (Goldman Sachs): What drives confidence cycling tougher holiday compares at Gap and improving 2-year stacks?
  Response: Consistent execution of big product plus culturally resonant campaigns (e.g., Better in Denim with strong engagement) supports continued momentum into holiday.

• Question from Matthew Robert Boss (JPMorgan): What drives Q3 revenue acceleration to +2% midpoint versus flat in Q2 and how are August trends?
  Response: Strength across Old Navy, Gap, and Banana; back-to-school momentum improved in July and continued in August, especially at Gap and Old Navy.

• Question from Matthew Robert Boss (JPMorgan): Will tariffs pressure operating income further in 2026 at low single-digit revenue growth?
  Response: They do not expect further operating income declines from 2026 tariff annualization; mitigation efforts should offset.

• Question from Lorraine Hutchinson (BofA Securities): How have pricing assumptions changed to mitigate tariffs, and why won’t H2 pressure persist into next year?
  Response: Pricing remains targeted within a balanced, value-focused playbook; with clearer timing, broader mitigation actions in 2026 should offset pressures that were hard to address given the late-August tariff tranche.

• Question from Dana Lauren Telsey (Telsey Advisory Group): What were comp drivers (traffic/ticket)? How are you thinking about H2 marketing spend? Any Banana leadership update?
  Response: Traffic healthy; AUR up, notably at Old Navy and Gap; Athleta used higher discounts. Marketing is more effective with lower spend via improved creative/media mix. Banana progress continues; leadership search ongoing.

• Question from Irwin Bernard Boruchow (Wells Fargo): Decompose the 150 bps merchandise margin decline vs prior guide mostly credit card—how much was card vs Athleta?
  Response: About 80–90 bps from the lapping of the credit card benefit; the remainder driven by deeper Athleta discounting to clear poor sellers; other brands performed well.