Gap's Q2 2026 Earnings Call: Contradictions Emerge on Tariff Mitigation, Marketing Efficiency, and Growth Outlook

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

Date of Call: August 28, 2025

Financials Results

• Revenue: $3.7B, flat YOY
• EPS: $0.57, up 6% YOY
• Gross Margin: 41.2%, down 140 bps YOY; up 360 bps vs two years ago
• Operating Margin: 7.8%, down 10 bps YOY

Guidance:

• FY25 net sales up 1–2% YOY (reaffirmed).
• FY25 operating margin 6.7–7.0%, including ~100–110 bps tariff headwind ($150–175M).
• FY25 gross margin to deleverage ~70–90 bps YOY; SG&A to slightly leverage.
• Q3 net sales up 1.5–2.5% YOY; strong back-to-school at Gap/Old Navy.
• Q3 gross margin to deleverage ~150–170 bps YOY (~200 bps tariff impact).
• Q3 SG&A to slightly deleverage (timing of tech spend).
• FY25 capex $500–550M.
• Expect no further operating income declines in 2026 from tariff annualization; mitigation underway.
• 2H inventory disciplined; unit purchases below sales.

Business Commentary:

* Revenue Performance and Strategic Priorities: - Gap Inc. reported comparable sales up 1% in Q2, with three largest brands (Old Navy, Gap, and Banana Republic) achieving positive comps. - The growth was driven by the execution of their strategic priorities, including maintaining financial rigor and reigniting their brands through product innovation and targeted marketing.

• Brand Reinvigoration and Marketing Success:
• Old Navy posted a 2% comp on top of last year’s 5% comp, driven by strategic focus on key categories like denim and active.

• The company’s marketing campaigns, like the “Disney Summer Americana” collection and “Old Navy, New Moves” featuring Lindsay Lohan, contributed to increased brand relevance and customer engagement.

• Operational Efficiency and Financial Discipline:

• Gap Inc. delivered an operating margin of 7.8% and ended the quarter with strong cash balances of approximately $2,400,000,000.

• This financial strength was due to rigorous cost management and strategic investments in technology and platform modernization.

• Brand-Specific Challenges and Leadership Changes:

• Athleta disappointed with a 9% decline in sales, requiring a brand reset under new leadership, with Maggie Gauger appointed as President and CEO.
• The brand’s underperformance was due to product misalignment with consumer expectations, leading to a focus on stabilizing and repositioning the brand for growth.

Sentiment Analysis:

• Management ‘surpassing our profit expectations’ with EPS up 6% and OM 7.8%, and reaffirming FY25 net sales growth of 1–2%. However, gross margin fell 140 bps YOY (credit-card lap and Athleta reset), and guidance reflects a 100–110 bps tariff headwind, lowering FY25 operating margin to 6.7–7.0%. Athleta sales declined 11% with comps down 9%.

Q&A:

• Question from Alex Stratton (Morgan Stanley): You lowered full-year EBIT/EPS despite a Q2 beat—Is the back-half weakness mostly tariffs, and why different vs peers?
  Response: Guidance change is predominantly new tariffs (100–110 bps OM, $150–175M); sales outlook and SG&A discipline unchanged, and ex-tariffs margins would expand with mitigation underway.

• Question from Alex Stratton (Morgan Stanley): Is double-digit operating margin still achievable longer term?
  Response: They see long-term margin expansion opportunities as tariffs are mitigated and the brand playbook drives sustainable profitable growth.

• Question from Marni Shapiro (The Retail Tracker): At Old Navy, are better stores due to higher in-store spend or merchandising/marketing changes?
  Response: Results are driven by merchandising discipline and efficient marketing (category shops in denim/active), not higher spending.

• Question from Marni Shapiro (The Retail Tracker): Is GAP’s AUR up excluding collaborations, and do collabs create a halo?
  Response: AUR is up even without collabs; growth stems from big product ideas and culturally relevant storytelling (e.g., Better in Denim) delivering consistent comps.

• Question from Brooke Roche (Goldman Sachs): How confident are you in cycling tougher Gap comps into holiday and improving the two-year stack?
  Response: Confidence comes from a repeatable playbook and strong campaign traction; sustained positive comps and cultural relevance support back-half momentum.

• Question from Matthew Boss (JPMorgan): What drives Q3 revenue acceleration and August trends; any 2026 OM constraints at low-single-digit growth?
  Response: Acceleration is led by strong back-to-school at Gap/Old Navy; August was strong; tariffs shouldn’t further cut 2026 operating income due to proactive mitigation.

• Question from Lorraine Hutchinson (Bank of America): How has pricing changed to offset tariffs, and why won’t 2H pressure carry into next year?
  Response: Pricing remains targeted and portfolio-based to preserve value; broader levers (sourcing, mix, pricing) enable fuller mitigation so 2026 should avoid further OI declines.

• Question from Dana Telsey (Telsey Group): Can you break down comp drivers and discuss H2 marketing spend and Banana leadership?
  Response: Traffic was healthy and AUR up (esp. Gap/Old Navy); marketing is more effective with lower spend via improved media mix/creative; Banana traction continues; leader search ongoing.

• Question from Ike Boruchow (Wells Fargo): Please parse Q2 merchandise margin decline (150 bps) between credit-card lap and Athleta.
  Response: About 80–90 bps was the credit-card lap; the remainder was deeper Athleta discounting, while other brands performed well.