Gap Inc. — Second Quarter Fiscal 2026 Earnings Summary

Financial Performance

• Net sales for the quarter ended August 1, 2026, were $3.7 billion, a 2% decrease compared to the prior year; comparable sales decreased 1%.
• Store sales decreased 3% year-over-year, while online sales decreased 1% and represented 35% of total net sales.
• Reported gross margin was 52.8%, an increase of 1,160 basis points versus last year, including a $512 million net benefit from IEEPA tariff refunds partially offset by a $95 million vendor appreciation commitment.
• Adjusted gross margin (excluding tariff benefits) was 41.4%, an increase of 20 basis points versus last year.
• Operating income was $676 million with an operating margin of 18.5%; adjusted operating income was $259 million with an adjusted operating margin of 7.1%.
• Net income was $501 million, resulting in diluted earnings per share (EPS) of $1.38; adjusted net income was $190 million with adjusted diluted EPS of $0.52.
• Year-to-date net cash from operating activities was $550 million, and free cash flow was $261 million.
• Ending inventory was $2.3 billion, flat compared to the prior year.
• Capital expenditures were $289 million year-to-date.

Guidance and Future Outlook

• Full-year fiscal 2026 net sales outlook updated to up 1% to 1.5% year-over-year (prior: up 1% to 2%).
• Full-year fiscal 2026 diluted EPS outlook raised to approximately $3.77 to $3.87.
• Full-year adjusted diluted EPS outlook raised to approximately $2.35 to $2.45 (prior: $2.30 to $2.40).
• Full-year adjusted operating margin outlook updated to approximately 7.4% to 7.6% (prior: 7.3% to 7.5%).
• Third quarter fiscal 2026 net sales outlook is up 1.5% to 2.5% year-over-year.
• Third quarter fiscal 2026 gross margin outlook is up approximately 25 to 75 basis points.
• Full-year adjusted operating expense as a percentage of net sales is expected to be about flat year-over-year.
• Full-year capital expenditures are expected to be approximately $650 million.
• Net store closures are expected to be about flat year-over-year.

Business Segments and Product Lines

• Old Navy net sales were $2.1 billion, down 4% year-over-year; comparable sales were down 4% due to pressure in women's seasonal assortment and an unanticipated traffic slowdown.
• Gap brand net sales were $844 million, up 9% year-over-year; comparable sales were up 10%, driven by performance in denim, fleece, and kids/baby categories.
• Banana Republic net sales were $478 million, up 1% year-over-year; comparable sales were up 3%.
• Athleta net sales were $264 million, down 12% year-over-year; comparable sales were down 12%.
• The company announced Michael Francis as the next President and CEO of Old Navy, succeeding Haio Barbeito.
• Average unit retail increased across all brands.

Market and Competitive Landscape

• The company operates nearly 3,500 store locations in approximately 35 countries, with 2,471 being company-operated.
• Market share data referenced is based on Circana data for the 12 months ending July 2026 for the US market.
• The company noted the highly competitive nature of the business regarding anticipating apparel trends and attracting customer traffic.

Risks and Challenges

• Risks include uncertainties related to government fiscal, monetary, trade, and tax policies, as well as consumer spending patterns.
• Potential impacts from recent changes in U.S. trade policy, tariffs, and trade tensions between the U.S. and other countries.
• Risks associated with supply chain disruptions, including labor strikes, port congestion, and increased transportation costs.
• Risks related to the successful implementation of brand reinvigoration strategies and the timeline for resetting Athleta.
• Risks regarding the ability to manage inventory and fulfillment operations effectively.
• Risks related to information security breaches, technology system failures, and data privacy.
• Risks associated with global sourcing, manufacturing, and compliance with vendor codes of conduct.

Management Commentary and Tone

• CEO Richard Dickson stated that while top-line results were modestly below expectations, operational rigor contributed to gross margin strength, allowing the company to exceed profit expectations.
• Management expressed pride in the momentum at the Gap brand and acknowledged work remaining at Old Navy, citing a clear understanding of performance factors and targeted actions already driving improvement.
• The tone emphasized disciplined execution and performing while transforming to win in the second half of the fiscal year.

Other Key Points

• The company returned $726 million to shareholders year-to-date through share repurchases and dividends.
• In the second quarter, the company completed a $200 million accelerated share repurchase program (ASR), receiving an additional 1.4 million shares, and repurchased 9.3 million shares in the open market for $200 million.
• $399 million remains under the existing share repurchase authorization.
• The company paid $62 million in dividends during the second quarter ($0.175 per share), a 6% increase from the prior year, and approved a third-quarter dividend of $0.175 per share.
• A $417 million adjustment to cost of goods sold was recorded related to the net IEEPA tariff recovery, including $95 million in refunds and $5 million in interest income received in the quarter.
• A $313 million pre-tax gain from a credit card interchange fee litigation settlement and a $50 million charitable contribution impacted first-quarter results and are excluded from adjusted metrics.
• Updated tariff rate assumptions following a Section 301 announcement are expected to provide approximately $15 million of net tariff relief to full-year gross profit and operating income.