Gap's Shares Gain 15% on Q2 Earnings Beat & Revised View

The Gap, Inc. GAP reported adjusted earnings of 52 cents per share for the second quarter of fiscal 2026, down 8.8% year over year but came above the Zacks Consensus Estimate of 50 cents. Revenues of $3.65 billion declined 2% year over year and missed the consensus mark of $3.72 billion by 1.9%. Comparable sales fell 1%, while gross margin strength helped the company exceed profit expectations. 

Gap delivered a 10% comparable-sales increase, while Old Navy declined 4% and Athleta fell 12%. Management highlighted disciplined pricing, inventory management and stronger execution at key brands as drivers of profitability.

As a result, Gap’s shares have jumped nearly 15% in after-hours trading yesterday. This Zacks Rank #3 (Hold) stock has dipped 0.8% in the past three months compared with the industry’s 9.5% decline.

GAP Expands Brand Momentum

Store sales decreased 3%, while online sales declined 1% and represented 35% of total net sales. 

The Gap brand remained the strongest performer in the portfolio. Net sales reached $844 million, up 9% year over year, while comparable sales increased 10%. Management attributed the performance to culturally relevant storytelling and strength in destination categories such as denim, fleece, and kids and baby. Our model had expected Gap brand's sales of $833.9 million for the reported quarter.

GAP Sees Mixed Brand Trends

Old Navy generated second-quarter net sales of $2.1 billion, down 4% year over year, with comparable sales also declining 4%. Management said weaker women’s seasonal assortments and an unexpected slowdown in traffic pressured results. 

Banana Republic delivered improvement, with net sales of $478 million, up 1%, and comparable sales up 3%. The brand benefited from stronger assortment, marketing and storytelling, with balanced performance across men’s and women’s categories. 

Athleta remained under pressure, with second-quarter net sales of $264 million declining 12% and comparable sales falling 12%. Management said the brand is focused on disciplined execution, improving inventory productivity and rebuilding customer engagement through stronger product and storytelling.

We had anticipated sales of $2.1 billion for Old Navy, $476.5 million for Banana Republic and $280.5 million for Athleta.

Gap Strengthens Margin Performance

Gap reported a gross margin of 52.8%, benefiting from adjustment related to the expected recovery of tariffs previously imposed under the International Emergency Economic Powers Act. Adjusted gross margin, excluding this benefit, was 41.4%, up 20 basis points year over year. 

Adjusted merchandise margin expanded 80 basis points, supported by the Gap brand and tariff mitigation strategies. However, higher promotional activity at Old Navy partially offset gains. Adjusted operating margin was 7.1%, while adjusted earnings per share came in at $0.52.

Gap Returns Cash to Shareholders

Gap ended the quarter with $2.5 billion in cash, cash equivalents and short-term investments, while year-to-date net cash from operating activities totaled $550 million. Free cash flow reached $261 million year to date. 

The company returned $262 million to shareholders during the quarter through share repurchases and dividends. Year to date, Gap has returned $726 million to shareholders, including $601 million of share repurchases and $125 million of dividends.

GAP Updates Fiscal 2026 Outlook

Gap updated its fiscal 2026 outlook, expecting full-year net sales growth of 1-1.5%, compared with the prior forecast of 1-2%. The company now expects Gap comparable sales growth in the high-single to low-double-digit range and Old Navy comparable sales to be flat to down 1%.

The company raised its adjusted operating margin outlook to 7.4-7.6% from 7.3-7.5% previously. Adjusted earnings per share guidance increased to $2.35-$2.45, supported by improved gross margin expectations and a lower weighted average share count following repurchase activity.

Key Stocks to Consider

We have highlighted three better-ranked stocks, namely, Target Corporation TGT, American Eagle Outfitters AEO and Boot Barn Holdings, Inc. BOOT.

Target offers guests fashionable, differentiated merchandise and everyday essentials at discounted prices. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Target’s current financial-year sales and EPS indicates growth of 4.4% and 11.4%, respectively, from the year-ago reported numbers. TGT delivered a trailing four-quarter earnings surprise of 10.5%, on average.

American Eagle is a specialty retailer of casual apparel, accessories and footwear. The company currently carries a Zacks Rank #2 (Buy). 

The consensus estimate for AEO’s current financial-year sales and EPS indicates growth of 5.7% and 17.3%, respectively, from the year-ago reported numbers. AEO delivered a trailing four-quarter earnings surprise of 48.5%, on average.

Boot Barn is a leading lifestyle retailer in the United States, specializing in western and work-related footwear, apparel and accessories. It currently has a Zacks Rank of 2.

The Zacks Consensus Estimate for Boot Barn’s current financial-year sales and EPS is expected to rise 15.7% and 22.6%, respectively, from the year-ago reported figures. BOOT delivered a trailing four-quarter earnings surprise of 11.4%, on average.

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This article originally published on Zacks Investment Research (zacks.com).

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