Gap Inc. reported fiscal second-quarter results that sent shares jumping roughly 13% the following trading session, a reaction driven by raised guidance and improving margins.
The headline numbers, however, mask a deeply uneven performance across the company’s four brands: Old Navy, Gap, Banana Republic, and Athleta.
Total company net sales fell 2% year over year to $3.7 billion, making clear that one strong brand cannot yet lift an entire portfolio.
The namesake Gap brand was the standout, growing net sales 9% year over year to $844 million, with comparable sales climbing 10% in the quarter.
CEO Richard Dickson described it as “another quarter of double-digit comparable sales,” marking the second consecutive quarter of that level of growth for the brand.
Old Navy, the company’s largest brand, told a very different story, with net sales falling 4% to $2.1 billion and comparable sales declining by the same margin.
Management attributed Old Navy’s weakness partly to a poor women’s seasonal assortment and slowing customer traffic, signaling the problems are not purely macroeconomic.
Banana Republic posted a modest 1% gain to $478 million in net sales, while Athleta continued its slide with a sharp 12% drop to $264 million, compounding a 9% decline from a year earlier.
The scale problem is critical to understanding these results: Old Navy’s $2.1 billion in quarterly net sales represents approximately 57% of companywide revenue, dwarfing the Gap brand entirely.
In dollar terms, Old Navy’s decline erased roughly $85 million in quarterly sales while the Gap brand added only about $70 million, explaining how a company with a hot brand still shrank overall.
To address the Old Navy challenge, Gap Inc. named retail veteran Michael Francis as the brand’s next president and CEO, succeeding Haio Barbeito in that role.
The company’s updated full-year outlook now assumes Old Navy comparable sales of flat to down 1%, revised down from a prior assumption of flat to up 1%.
Meanwhile, the full-year comparable sales assumption for the Gap brand was raised to high-single-digit to low-double-digit growth, reflecting continued confidence in the brand’s momentum.
Reported earnings looked spectacular on the surface, with gross margin reaching 52.8% and earnings per share hitting $1.38, but those figures were heavily inflated by an accounting event.
The quarter included a $417 million net benefit to cost of goods sold from refunds of U.S. tariffs the company had previously paid, with remaining refund cash expected in the third quarter.
Stripping out that benefit, adjusted gross margin came in at 41.4%, up 20 basis points year over year, with adjusted earnings of $0.52 per share on an underlying basis.
For the full year, Gap Inc. raised its adjusted earnings outlook to between $2.35 and $2.45 per share, up from a prior range of $2.30 to $2.40, on an adjusted operating margin of approximately 7.4% to 7.6%.
The company also trimmed the top end of its net sales outlook to up 1% to 1.5% for the year, compared to a previous range of up 1% to 2%.
With shares trading near $24 and a dividend yield of roughly 3%, the stock trades at about 10 times the midpoint of the full-year adjusted earnings outlook, a modest valuation given the raised guidance.
The investment case ultimately rests on whether Old Navy’s new leadership can reverse its decline before the Gap brand’s growth alone becomes insufficient to carry the broader business forward.
