Gap Inc. reported that same-store sales at Athleta fell 12 percent in the second quarter, the banner’s sixth straight quarter of declines. Gap executives told analysts Athleta is expected to show similar results in the back half as it prioritizes inventory management and reducing promotions.

“During the quarter, we proactively managed inventory tightly while testing and learning selectively with new product launches,” said Richard Dickson, Gap Inc.’s president and CEO, said on the quarterly investor call. He said this resulted in better inventory productivity with “early signs” of customer acceptance of newer products like the Journey Travel collection launched last quarter.

Dickson added, “As we continue to evolve our assortment, our priorities are clear. We are increasing newness, reducing reliance on promotions and seeking to rebuild customer engagement through better product and stronger storytelling. We have also strengthened the organization with new talent across digital and merchandising to improve execution over time. With our turnaround efforts still in the early stages, we are continuing to take a measured and disciplined approach to inventory and marketing investments as we continue to assess customer response in the second half. While this approach may limit top line improvement in the near term, we believe it is important to rebuild the business on a stronger foundation for sustainable growth.”

Net sales at Athleta were also down 12 percent in the period to $264 million from $300 million a year ago. Athleta operated 251 stores at the close of the quarter, down from 252 at the start of the year.

Looking ahead, Katrina O’Connell, Gap Inc.’s EVP and CFO, said Athleta’s “measured approach” to building inventory will weigh on the sales performance in the second half. She said, “While the teams are striving to do better, our outlook for Athleta assumes full year trends remain similar to the first half.”

Asked by an analyst in the Q&A section of the call about the level of inventory mix changes to Athleta coming for the fall, O’Connell said, “We’re largely taking a very conservative approach on inventory at Athleta. What’s interesting is that while that’s constraining the top line, it’s actually really helping us continue to build on their profitability in the near term, while we really read and react, how the customer is reacting to the new fashion product. And so far, that’s been quite good. It’s just, we’re being very careful about how we buy it in the near term.”

Gap Inc. Results
Companywide, sales were down 2 percent in the quarter, missing guidance calling for sales to be flat to down 1 percent. However, adjusted gross margin excluding the benefit of tax refunds of 41.4 percent topped guidance of 41.2 percent. Operating expenses were 34.3 percent of sales, missing guidance of 33.4 percent.

Gap Inc. slightly raised its adjusted EPS for the year while slightly lowering its expectations for sales due to softness at Old Navy.

“While not the revenue outcome we wanted, continued operational and financial rigor contributed to gross margin strength. We also maintained market share, reflecting the continued resonance of our brand portfolio,” Dickson told analysts. “The Gap brand delivered another exceptional quarter with comparable sales increasing 10% and Banana Republic continued to build momentum, posting its fifth consecutive quarter of positive comps. Athleta’s top line remained pressured, though we saw encouraging improvements in inventory productivity. At Old Navy, as we previewed on last quarter’s call, seasonal categories continued to weigh on performance. While we took actions to address this as the quarter progressed, we also experienced a slowdown in traffic, which led to a modest miss versus our expectations. While this is disappointing, I have confidence in our plans to improve performance in the second half. Over the past quarter, Katrina and I have been deeply involved with the Old Navy team in conducting a thorough review of the business. We have a clear understanding of where our execution fell short and have moved quickly to strengthen our plans

Sales
Companywide, net sales of $3.7 billion were down 2 percent compared to last year. Comparable sales were down 1 percent.

At Old Navy, second quarter net sales of $2.1 billion were down 4 percent compared to last year. Comparable sales were down 4 percent, reflecting expected pressure in the women’s seasonal assortment, in addition to an unanticipated slowdown in traffic.

On the analyst call, Dickson said Old Navy, as expected, was impacted by its women’s summer seasonal assortment, with declines seen in dresses, shorts and swim, as pricing adjustments were made.  He said, “What we did not anticipate was the degree to which our marketing would fall short in driving traffic. We are not satisfied with this result and have responded quickly. As we move into the third quarter the headwind from summer categories becomes much less significant. This gives us a clear runway for improvement as key categories like denim, active, sweaters and knits drive the business. Additionally, as we sharpen fashion content and pricing, we believe our fall assortment will provide an improved value equation.”

In active, Dickson said Old Navy is the fifth largest brand in the country and plans to build on its position with the launch of Old Navy Sport. Dickson said, “With the success we’ve had and continued innovation, this fall, we are amplifying our presence in the category with the introduction of Old Navy Sport, beginning with an elevated merchandising experience, including approximately 40 shop-in-shops in select stores and storytelling centered on technical innovation and style at an incredible value. Old Navy Sport will become Old Navy’s active brand.”

Gap Inc. also promoted Michael Francis, who joined the company as Old Navy’s chief customer officer in March, to brand president and CEO at Old Navy, succeeding Haio Barbeito, effective November 2. Francis is best known as chief marketing officer at Target in the 2000s. He also held leadership roles at JCPenney and Walmart.

Dickson told analysts, “As we look ahead to the brand’s next phase, Michael’s deep experience in customer-centric brand building and track record of strong commercial execution will be instrumental in unlocking the brand’s full potential, and I am confident that now is the right time for him to step into this role. Michael has a proven ability to connect creativity, culture and commerce in ways that will energize the business. I’ve seen this firsthand as we have worked closely together to develop our plans for the second half and position Old Navy to capture the significant opportunity we see ahead.”

At the flagship Gap banner, second quarter net sales of $844 million were up 9 percent compared to last year. Comparable sales were up 10 percent, with the brand’s “focus on big ideas and culturally relevant  storytelling continuing to drive strong performance in destination categories including denim, fleece, and kids and baby.”

Banana Republic’s second quarter net sales of $478 million were up 1 percent compared to last year. Comparable sales were up 3 percent. Gap said, “Performance was balanced across both men’s and women’s as the brand continued to make progress in strengthening its assortment, supported by more distinctive marketing and brand storytelling. “

By channel across banners, store sales decreased 3 percent compared to last year. The company ended the quarter with nearly 3,500 store locations in about 35 countries, of which 2,471 were company-operated. Online sales decreased 1 percent compared to last year and represented 35 percent of total net sales.

Profitability

  • Gross margin of 52.8 percent increased 1,160 basis points versus last year on a reported basis including 1,140 basis points of net benefit related to the expected recovery of tariffs imposed under the International Emergency Economic Powers Act (IEEPA). Gap received IEEPA tariff refunds of approximately $512 million, partially offset by a commitment of appreciation of approximately $95 million for certain vendors.
  • Adjusted gross margin excluding this benefit was 41.4 percent and  increased 20 basis points versus last year.
  • Merchandise margin increased 1,220 basis points versus last year on a reported  basis. Adjusted for the net IEEPA tariff recovery, merchandise margin increased 80 basis points including the benefit from tariff mitigation strategies with the  underlying expansion primarily driven by strength at the Gap brand, partially  offset by higher promotional activity at Old Navy. Average unit retail increased  across all brands.
  • Rent, occupancy, and depreciation (“ROD”) as a percent of sales deleveraged 60 basis points versus last year.
  • Operating expense was $1.3 billion or 34.3 percent of net sales.
  • Operating income was $676 million and operating margin was 18.5 percent. Adjusted operating income was $259 million and adjusted operating margin was 7.1 percent, excluding the net IEEPA tariff recovery.
  • The effective tax rate was 26.3 percent and adjusted effective tax rate was 26.4 percent, which excludes  the tax impact of the net IEEPA tariff recovery and related interest income.
  • Net income was $501 million and diluted earnings per share were $1.38. Adjusted net income was $190 million and adjusted diluted earnings per share were 52 cents a share, excluding the net IEEPA tariff recovery and related interest income.

Balance Sheet and Cash Flow Highlights

  • Ended the quarter with cash, cash equivalents and short-term investments of $2.5 billion, an increase of 2 percent from the prior year.
  • Year-to-date net cash from operating activities was $550 million. Free cash flow, defined as net cash from operating activities less purchases of property and equipment, was $261 million year-to-date.
  • Ending inventory of $2.3 billion was flat compared to last year.
  • Capital expenditures were $289 million year-to-date.

Shareholder Returns

  • Returned $262 million of cash to shareholders in the form of share repurchases and dividends during the second quarter of fiscal 2026.

Share Repurchases:

  • In the second quarter, the company completed its previously announced $200 million accelerated share repurchase program (“ASR”). Following the initial  delivery of 6.9 million shares in the first quarter, the company received an  additional 1.4 million shares in May, resulting in aggregate repurchases under  the program of 8.3 million shares.
  • In addition to the ASR, repurchased 9.3 million shares in the open market for $200 million during the second quarter.
  • The company has $399 million remaining under its existing share repurchase authorization.

Dividends:

  • Paid $62 million in dividends during the second quarter of fiscal 2026, reflecting  a quarterly dividend of $0.175 per share, up 6 percent from the prior year.
  • The company’s Board of Directors approved a third quarter fiscal 2026 dividend  of $0.175 per share.
  • Year-to-date, the company has returned $726 million to shareholders inclusive of $125 million in the form of dividends and $601 million of share repurchases.

Tariff Update
In the second quarter, the company recorded a $417 million adjustment to cost of goods sold related to the net IEEPA tariff recovery. The company received refunds of $95 million and related interest income of $5 million in the second quarter of 2026, with the remaining refunds  and related interest income expected in the third quarter. The company’s adjusted outlook excludes the impact of the refunds.

Following the Section 301 announcement in July, the company updated its tariff rate  assumptions to incorporate a roughly 10 percent incremental rate from July 24, 2026 through the end  of August reflecting the rates currently in place. The prior outlook assumed an incremental high-teens rate beginning July 24, 2026. This update is expected to provide approximately $15 million of net tariff relief to full-year gross profit and operating income, or approximately 10 basis points of benefit to full-year gross margin and operating margin. The benefit is expected to be concentrated in the fourth quarter based on the timing of receipts and is reflected in the company’s current outlook.

Fiscal 2026 Outlook
The company’s outlook reflects a balanced approach, factoring in visibility into the consumer and broader macroeconomic and geopolitical environment in the near term which is largely unchanged, while recognizing potential uncertainties moving forward around energy prices and U.S. tariffs.

The company’s updated full-year net sales outlook of up 1 percent to 1.5 percent now assumes Old Navy comparable sales of flat to down 1 percent, compared with the prior range of flat to up 1 percent, reflecting the brand’s second-quarter performance. Comparable sales at the Gap brand are now expected to grow in the high-single to low double-digit range, compared with prior expectations of up  high-single digits, while expectations for the balance of the portfolio remain unchanged.

On a reported basis, the company now expects full year diluted earnings per share to be  approximately $3.77 to $3.87 compared to prior guidance in the range of $2.83 to $2.93

The company’s outlook below is provided on an adjusted, non-GAAP basis.

Image courtesy Gap Inc.