Q3 2026 Earnings Call: Contradictions Emerge on Gross Margins, Tariffs, Product Strategy, and Brand Positioning

Date of Call: November 20, 2025

Financials Results

• Revenue: $3.9B net sales, up 3% YOY (comps +5%)
• EPS: $0.62 per share, down 14% YOY (prior year $0.72)
• Gross Margin: 42.4%, down 30 bps YOY; merchandise margins down ~70 bps with an estimated 190 bps tariff impact (implies ~120 bps underlying expansion)
• Operating Margin: 8.5%, down 80 bps YOY including estimated 190 bps tariff impact (implies ~110 bps underlying expansion)

Guidance:

• Full-year 2025 net sales growth now expected 1.7%–2.0% YOY (high end of prior range).
• Full-year gross margin expected to deleverage ~50 bps YOY; assumes ~100–110 bps annual net tariff impact; ex-tariff implies ~50–60 bps underlying expansion.
• Full-year operating margin now expected ~7.2% (prior 6.7%–7.0%); includes ~100–110 bps tariff impact; ex-tariff implies ~80–90 bps underlying expansion.
• SG&A expected to leverage slightly; $150M in core cost savings targeted with partial reinvestment into growth.
• Income tax rate ~28% (up 1 ppt), ~ $0.03 EPS headwind to 2026.
• Tariff timing: Q1 similar to Q4, mitigation benefits in Q2, back half 2026 becomes a tailwind.
• Board approved Q4 dividend of $0.165 per share.

Business Commentary:

• Strong Financial Performance:
• Gap Inc. reported net sales of $3.9 billion for Q3 2025, up 3% year-over-year, with comparable sales up 5%.

• The growth was driven by strong performance across brands like Old Navy and Gap, and operational rigor.

• Brand Growth and Reinvigoration:

• Old Navy had a strong quarter with comparable sales up 6%, and Gap saw growth of 7%, marking the eighth consecutive quarter of positive comps.
• This momentum is attributed to the brand's reinvigoration playbook, strategic partnerships, and compelling product offerings.

• Denim and Active Apparel Sales:
• Denim products, particularly at Gap, posted significant growth, contributing to the brand's success.

• The strong performance in active apparel, especially at Old Navy, was driven by innovation and strategic partnerships.

• Operational and Strategic Efficiency:

• Gap Inc. achieved an operating margin of 8.5%, benefiting from growth in Average Unit Retail (AUR).
• The company's supply chain strength and strategic cost management, including cost savings and strategic investments, supported this efficiency.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management repeatedly stated results exceeded expectations across net sales, gross margin and operating margin and raised full-year outlook. Richard: "highest quarterly comp in over 4 years" and Katrina: "we are raising our full year 2025 gross margin and operating margin outlook," highlighting confidence and upward guidance.

Q&A:

• Question from Alexandra Straton (Morgan Stanley): Can you dig in on what drove the strong comp acceleration at the Gap banner and how to think about sustainable comp levels? And Katrina, what surprised the upside versus your initial expectations on gross margin—did tariffs play a role and how do you think about steady state on that line?
  Response: Gap's comp acceleration was driven by a viral denim campaign and renewed brand relevance attracting younger consumers; gross margin outperformance resulted from higher AUR and less discounting while tariffs were as expected (~190 bps).

• Question from Robert Drbul (BTIG): Can you expand on AUR trends, how you're managing AUR, and growth plans into Q4 and 2026?
  Response: AUR improved due to brand relevance and inventory discipline, enabling less discounting and stronger full-price sell-through; management is confident AUR growth can continue into Q4.

• Question from Matthew Boss (JPMorgan): What drove the top-line inflection at Old Navy this quarter and how is it differentiated for market share? Katrina, given cost actions, how to think about operating income dollar growth versus low-single-digit top-line?
  Response: Old Navy momentum came from trend-right assortments, category strength (kids/denim/active) and partnerships; company targets $150M in cost savings, guiding FY operating margin to ~7.2% and expects tariff impacts to be mitigated in 2026.

• Question from Brooke Roach (Goldman Sachs): How do you feel about the store fleet today? Any investments needed—remodels or changes in store count for 2026?
  Response: Continuing to optimize the ~2,500-store fleet by closing underperformers (~35 more in FY25), testing new formats and selectively investing in high-return remodels and strategic openings.

• Question from Adrienne Yih-Tennant (Barclays): How does appointing creative leaders like Zac Posen change accretive thinking and how does marketing complement product to create the flywheel?
  Response: Elevating creative leadership and culturally relevant marketing (influencer/social) is expanding brand relevance, driving discovery and customer acquisition, exemplified by high-impact campaigns.

• Question from Dana Telsey (Telsey Group): Are pricing adjustments becoming less necessary as tariff mitigation works? And how do you view the consumer across brands and income cohorts?
  Response: Only selective pricing was taken (e.g., denim); company sees strength across low/mid/high income cohorts and is benefiting from less discounting and better regular-price sell-through.

• Question from Lorraine Maikis (Bank of America): Regarding Athleta, how do you feel about inventory levels/content and is there a timeline for sales stabilization?
  Response: Athleta is in a deliberate reset under new leadership; inventory has been lowered to align with weaker sales and stabilization will take time as assortment, merchandising and marketing are reset.

• Question from Paul Lejuez (Citigroup): Which brand saw the greatest unit increases, and what will the inventory dollars vs unit gap look like at end of Q4 and into 1H26?
  Response: Unit gains were strongest at Old Navy and Gap; company keeps unit purchases below sales to maintain flexibility and expects Q4 inventory position to be similar to Q3.

• Question from Corey Tarlowe (Jefferies): What is the strategic role of partnerships and how have consumers responded—do collaborations reduce the need for promotions?
  Response: Authentic collaborations expand relevance and attract new customers (25% of collab shoppers were new; 20% then shop beyond the collab), driving trial and broader engagement rather than just promotions.

• Question from Carson (Evercore ISI) on behalf of Michael Binetti: If tariffs are set aside, Q3 showed underlying gross margin expansion—was that led by AUR and is it safe to carry that into Q4?
  Response: Q3 margin strength came from commodities, supply-chain leverage and AUR, but Q4 guidance does not assume the same AUR upside; tariff impact in Q4 is modeled similar to Q3 and promotions are assumed broadly similar YOY.

Contradiction Point 1

Gross Margin Performance and Expectations

It involves a shift in the company's gross margin performance and expectations, which are crucial indicators for investors regarding financial health and operational efficiency.

What drove the strong comp acceleration at Gap? What are sustainable comp levels for Gap? What caused the gross margin to exceed expectations? - Alexandra Straton(Morgan Stanley)

20251121-2026 Q3: Gross margin exceeded expectations by over 100 basis points, driven by in-line tariff expectations and stronger-than-expected AURs, indicating lower discounting. - Katrina O'Connell(CFO)

What drove the comp acceleration at the Gap banner and what sustainable comp levels do you expect for that business? Additionally, what caused the gross margin upside versus initial expectations and what steady-state gross margin should we anticipate moving forward? - Alexandra Straton(Morgan Stanley)

2026Q3: Gross margin exceeded expectations by over 100 basis points, driven by in-line tariffs and strong AUR growth from consumer response to product and storytelling. - Katrina O'Connell(CFO)

Contradiction Point 2

Tariff Impact on Margins

It involves the impact of tariffs on margins, which is a critical factor for financial projections and investor expectations.

How will tariffs affect margins and gross margin expansion? - Unknown Analyst(Evercore ISI)

20251121-2026 Q3: Tariffs continue to pressure margins, but commodity benefits and supply chain leverage are aiding. - Katrina O'Connell(CFO)

Why are you lowering full-year EBIT and EPS guidance despite strong Q2 results? Is it primarily due to tariffs or other factors? - Alexandra Straton(Morgan Stanley)

2026Q2: The biggest update is the $150 million to $175 million tariff impact, with $100 to $110 basis points affecting operating margin. - Katrina O'Connell(CFO)

Contradiction Point 3

Product and Pricing Strategy

It highlights changes in product and pricing strategies, which can impact consumer perceptions and purchasing behavior, ultimately affecting sales and market positioning.

How are you managing AUR trends? What are your growth plans for AUR? - Robert Drbul(BTIG)

20251121-2026 Q3: Pricing inputs are considered while maintaining value proposition. Q3 saw select pricing increases in denim, supported by increased price elasticity. - Richard Dickson(CEO)

How do pricing strategies contribute to mitigating tariffs? - Adrienne Yih(Barclays)

2025Q1: We are making strategic investments to drive long-term growth while balancing profitability. We are selectively investing in higher-quality materials and designs, maintaining a competitive value proposition. - Richard Dickson(CEO)

Contradiction Point 4

Old Navy's Product and Differentiation Strategy

It reflects differing perspectives on Old Navy's product offerings and how the company positions its brand in the market, which directly impacts sales and market share.

What drove Old Navy's revenue growth and how is it differentiating itself in the market? How do you project annual operating income growth? - Matthew Boss(JPMorgan)

20251121-2026 Q3: Old Navy's strength in strategic categories like kids and baby, denim, and active contributes to consistent market share growth. Strategic partnerships, like Disney and Anna Sui collaborations, enhance brand relevance and revenue. - Richard Dickson(CEO)

What drove Old Navy's top-line inflection this quarter? How does Old Navy differentiate itself in the market share opportunity compared to Gap? How should we assess annual operating income growth considering cost structure actions? - Matthew Boss(JPMorgan)

2026Q3: Old Navy's strength in trend-right product, compelling storytelling, and strategic partnerships like Disney and Anna Sui drive momentum. Differentiation is seen in partnerships and product offerings like Beauty. Strong holiday offerings expected. - Richard Dickson(CEO)