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Gap Q1 Earnings Miss Estimates, Comparable Sales Rise 2% Y/Y
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Key Takeaways
GAP posted Q1 FY26 adjusted EPS of $0.38 and revenues of $3.50B, both below consensus.
GAP comps rose 2%, positive for a ninth straight quarter; Old Navy and Banana Republic grew.
GAP gross margin fell to 40.5% on tariffs; adjusted operating margin declined 230 basis points.
The Gap, Inc. (GAP - Free Report) delivered adjusted earnings of 38 cents per share in the first quarter of fiscal 2026, down 25.5% year over year and missing the Zacks Consensus Estimate of 39 cents. Net sales of $3.50 billion rose 1% year over year but fell short of the consensus mark of $3.53 billion.
Comparable sales (comps) increased 2% for the ninth straight quarter of positive comps, led by a standout performance at the Gap brand. Still, tariff-related pressure and higher spending on growth initiatives weighed on adjusted profitability.
Gap’s shares fell nearly 4% in the after-hours session yesterday on soft first-quarter results and trimmed sales view for fiscal 2026. Shares of this Zacks Rank #4 (Sell) company have lost 9.1% compared with the industry’s 0.2% drop over the past six months.
GAP Brands' Results
Results across brands were uneven, with strength concentrated in the Gap banner and more pressure in Athleta. Gap Global posted net sales of $796 million, up 10% year over year, alongside a 10% comps gain, reflecting momentum in key destination categories such as denim, fleece, and kids and baby.
Old Navy Global generated $2 billion of net sales, up 1% year over year, while comps increased 1%. Banana Republic Global recorded net sales of $431 million, up 1%, with comps up 2%. Athleta remained soft, with net sales down 12% to $270 million and comparable sales down 11%.
Gap brand's revenues surpassed our model's estimate of $745.3 million, while Banana Republic and Athleta brands' revenues lagged our estimates of $434.4 million and $301.1 million, respectively. Old Navy's revenues were in line with our model's estimate.
Gross margin was 40.5%, down 130 basis points from the year-ago quarter, yet management said the outcome exceeded expectations. Merchandise margin declined 100 basis points, including an anticipated net tariff impact of about 200 basis points, implying underlying improvement supported by better inventory management and strength at the Gap brand. Average unit retail rose across all brands.
Adjusted operating income was $182 million and adjusted operating margin was 5.2%, down 230 basis points year over year, mainly reflecting the net tariff impacts. We had expected adjusted gross margin contraction of 150 basis points to 40.3% and adjusted operating margin decrease of 220 basis points to 5.3%.
On the expense line, reported operating expense was $972 million, or 27.8% of net sales. Adjusted operating expense was $1.2 billion, translating to 35.3% of net sales, as spending stepped up for the loyalty relaunch, investments tied to beauty and accessories, and continued work on technology and next-generation capabilities.
Gap Financial Health
The company ended the fiscal first quarter with $2.6 billion in cash, cash equivalents and short-term investments, up 15% from the year-ago quarter, while ending inventory of $2.1 billion was flat year over year.
Management returned $464 million to shareholders via repurchases and dividends in the quarter. This included an accelerated share repurchase program and additional open-market repurchases, remaining $599 million under its present repurchase authorization. It has approved second-quarter dividends of $0.175 per share, up 6% from the prior-year rate. Free cash flow was $78 million in the quarter, after $135 million of capital expenditures.
GAP Outlook Turns More Cautious on Sales
For fiscal 2026, the company trimmed the top-line view, now expecting net sales growth of 1-2% year over year, reflecting a more tempered outlook for Old Navy based on early-year trends. It expects Old Navy comps to be flat to up 1% for the fiscal year. Even with that moderation, management raised fiscal 2026 adjusted earnings outlook to $2.30-$2.40 per share, citing tailwinds from interest income, tax rate and share count. Earlier, management had expected sales growth of 2-3% and adjusted earnings of $2.20-$2.35 for the current fiscal year.
GAP still projects adjusted operating margin in the range of 7.3-7.5% and adjusted operating expenses, as a percentage of sales, nearly flat year over year at 33.5% seen in fiscal 2025. This reflects $150 million in cost savings to boost efficiency and effectiveness by managing inflation and funding growth initiatives. Capital expenditures are expected to be about $650 million in investments with respect to mainly stores, technology and supply-chain initiatives.
The outlook assumes a 10% tariff rate under Section 122 for inventory received after Feb. 24, 2026 through July 24, 2026, followed by a reversion for the rest of the year to the IEEPA-level tariff rates included in the prior outlook. This is likely to result in about $80 million of net tariff relief to gross profit and operating income, or nearly 50 basis points of gain to gross margin and operating margin in fiscal 2026.
The benefit is likely to be concentrated in the second and third quarters based on the timing of receipts. Gap is reserving the full anticipated benefit to offer flexibility to business for the rest of the year, with nearly half intended to offset the potential impact of higher fuel costs and the balance for potential changes in the promotional and competitive landscape. Net store closures are likely to remain almost flat year over year.
For the second quarter of fiscal 2026, GAP expects net sales to be flat to down 1% year over year and gross margin to be flat to down 50 basis points, with Old Navy pressured by seasonal-category softness that management attributed primarily to execution in dresses and certain other seasonal assortments Operating expenses, as a percentage of sales, to deleverage about 110-120 basis points from 33.4% seen in the year-earlier quarter.
KSS delivered a trailing four-quarter earnings surprise of 72.3%, on average. The Zacks Consensus Estimate for KSS’ current financial-year sales indicates a drop of 1% from the year-ago number.
Levi Strauss & Co. (LEVI - Free Report) , which is a designer and marketer of jeans, casual wear and related accessories, currently carries a Zacks Rank #2 (Buy).
LEVI delivered a trailing four-quarter earnings surprise of 21.4%, on average. The Zacks Consensus Estimate for Levi Strauss’ current financial-year sales indicates growth of 5.2% from the year-ago number.
Fossil Group, Inc. (FOSL - Free Report) , which is a designer and marketer of fashion accessories, currently carries a Zacks Rank of 2.
The Zacks Consensus Estimate for FOSL’s current financial-year earnings is expected to rise 87.6% from the corresponding year-ago reported figure. FOSL delivered an earnings surprise of 86.4% in the last reported quarter.
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Gap Q1 Earnings Miss Estimates, Comparable Sales Rise 2% Y/Y
Key Takeaways
The Gap, Inc. (GAP - Free Report) delivered adjusted earnings of 38 cents per share in the first quarter of fiscal 2026, down 25.5% year over year and missing the Zacks Consensus Estimate of 39 cents. Net sales of $3.50 billion rose 1% year over year but fell short of the consensus mark of $3.53 billion.
Comparable sales (comps) increased 2% for the ninth straight quarter of positive comps, led by a standout performance at the Gap brand. Still, tariff-related pressure and higher spending on growth initiatives weighed on adjusted profitability.
Gap’s shares fell nearly 4% in the after-hours session yesterday on soft first-quarter results and trimmed sales view for fiscal 2026. Shares of this Zacks Rank #4 (Sell) company have lost 9.1% compared with the industry’s 0.2% drop over the past six months.
GAP Brands' Results
Results across brands were uneven, with strength concentrated in the Gap banner and more pressure in Athleta. Gap Global posted net sales of $796 million, up 10% year over year, alongside a 10% comps gain, reflecting momentum in key destination categories such as denim, fleece, and kids and baby.
Old Navy Global generated $2 billion of net sales, up 1% year over year, while comps increased 1%. Banana Republic Global recorded net sales of $431 million, up 1%, with comps up 2%. Athleta remained soft, with net sales down 12% to $270 million and comparable sales down 11%.
Gap brand's revenues surpassed our model's estimate of $745.3 million, while Banana Republic and Athleta brands' revenues lagged our estimates of $434.4 million and $301.1 million, respectively. Old Navy's revenues were in line with our model's estimate.
The Gap, Inc. Price, Consensus and EPS Surprise
The Gap, Inc. price-consensus-eps-surprise-chart | The Gap, Inc. Quote
Gap Margins & Expenses
Gross margin was 40.5%, down 130 basis points from the year-ago quarter, yet management said the outcome exceeded expectations. Merchandise margin declined 100 basis points, including an anticipated net tariff impact of about 200 basis points, implying underlying improvement supported by better inventory management and strength at the Gap brand. Average unit retail rose across all brands.
Adjusted operating income was $182 million and adjusted operating margin was 5.2%, down 230 basis points year over year, mainly reflecting the net tariff impacts. We had expected adjusted gross margin contraction of 150 basis points to 40.3% and adjusted operating margin decrease of 220 basis points to 5.3%.
On the expense line, reported operating expense was $972 million, or 27.8% of net sales. Adjusted operating expense was $1.2 billion, translating to 35.3% of net sales, as spending stepped up for the loyalty relaunch, investments tied to beauty and accessories, and continued work on technology and next-generation capabilities.
Gap Financial Health
The company ended the fiscal first quarter with $2.6 billion in cash, cash equivalents and short-term investments, up 15% from the year-ago quarter, while ending inventory of $2.1 billion was flat year over year.
Management returned $464 million to shareholders via repurchases and dividends in the quarter. This included an accelerated share repurchase program and additional open-market repurchases, remaining $599 million under its present repurchase authorization. It has approved second-quarter dividends of $0.175 per share, up 6% from the prior-year rate. Free cash flow was $78 million in the quarter, after $135 million of capital expenditures.
GAP Outlook Turns More Cautious on Sales
For fiscal 2026, the company trimmed the top-line view, now expecting net sales growth of 1-2% year over year, reflecting a more tempered outlook for Old Navy based on early-year trends. It expects Old Navy comps to be flat to up 1% for the fiscal year. Even with that moderation, management raised fiscal 2026 adjusted earnings outlook to $2.30-$2.40 per share, citing tailwinds from interest income, tax rate and share count. Earlier, management had expected sales growth of 2-3% and adjusted earnings of $2.20-$2.35 for the current fiscal year.
GAP still projects adjusted operating margin in the range of 7.3-7.5% and adjusted operating expenses, as a percentage of sales, nearly flat year over year at 33.5% seen in fiscal 2025. This reflects $150 million in cost savings to boost efficiency and effectiveness by managing inflation and funding growth initiatives. Capital expenditures are expected to be about $650 million in investments with respect to mainly stores, technology and supply-chain initiatives.
The outlook assumes a 10% tariff rate under Section 122 for inventory received after Feb. 24, 2026 through July 24, 2026, followed by a reversion for the rest of the year to the IEEPA-level tariff rates included in the prior outlook. This is likely to result in about $80 million of net tariff relief to gross profit and operating income, or nearly 50 basis points of gain to gross margin and operating margin in fiscal 2026.
The benefit is likely to be concentrated in the second and third quarters based on the timing of receipts. Gap is reserving the full anticipated benefit to offer flexibility to business for the rest of the year, with nearly half intended to offset the potential impact of higher fuel costs and the balance for potential changes in the promotional and competitive landscape. Net store closures are likely to remain almost flat year over year.
For the second quarter of fiscal 2026, GAP expects net sales to be flat to down 1% year over year and gross margin to be flat to down 50 basis points, with Old Navy pressured by seasonal-category softness that management attributed primarily to execution in dresses and certain other seasonal assortments Operating expenses, as a percentage of sales, to deleverage about 110-120 basis points from 33.4% seen in the year-earlier quarter.
Key Retail Stock Picks
Kohl's Corporation (KSS - Free Report) , which is a department store chain, currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
KSS delivered a trailing four-quarter earnings surprise of 72.3%, on average. The Zacks Consensus Estimate for KSS’ current financial-year sales indicates a drop of 1% from the year-ago number.
Levi Strauss & Co. (LEVI - Free Report) , which is a designer and marketer of jeans, casual wear and related accessories, currently carries a Zacks Rank #2 (Buy).
LEVI delivered a trailing four-quarter earnings surprise of 21.4%, on average. The Zacks Consensus Estimate for Levi Strauss’ current financial-year sales indicates growth of 5.2% from the year-ago number.
Fossil Group, Inc. (FOSL - Free Report) , which is a designer and marketer of fashion accessories, currently carries a Zacks Rank of 2.
The Zacks Consensus Estimate for FOSL’s current financial-year earnings is expected to rise 87.6% from the corresponding year-ago reported figure. FOSL delivered an earnings surprise of 86.4% in the last reported quarter.