EXEC: Gap Inc. CFO Expects Athleta’s Q1 Weakness to Continue into Second Quarter

Gap, Inc. reported same-store sales at its Athleta banner declined 11 percent in the first quarter, below expectations, as the women’s activewear chain makes slow progress in clearing obsolete inventories.

Katrina O’Connell, Gap Inc.’s EVP and CFO, on an analyst conference call, said Athleta saw a “more challenging quarter” in the latest period, with the 11 percent comp decline ” below our expectations as we work through legacy products while we look towards launching a stronger and more relevant assortment.”

The decline for the period comes on top of an 8 percent decline in the year-ago Q1 period. O’Connell further said Athleta’s 2026 second-quarter performance is expected to be similar to the 2026 first quarter, given the “slower rebuild.”

First-quarter net sales of $270 million at Athleta declined 12 percent compared to last year. Athleta closed the quarter with 252 stores.

Athleta marked its sixth straight quarter of declines, with comps down overall by 9 percent in 2025. In August 2025, Maggie Gauger replaced Chris Blakeslee as Athleta president and CEO to orchestrate a turnaround. Previously, Gauger served as the head of Nike’s North America Women’s business.

On the call, Gap Inc. CEO Richard Dickson noted that as detailed on the company’s fourth-quarter analyst call, 2026 was expected to be a “rebuild year” for Athleta, but progress in clearing legacy inventory has fallen short of plan.

“Since Maggie joined as the president in August of last year, the team has been taking steps to strengthen the brand’s foundation, restoring clarity to its brand purpose, repositioning talent, and rearchitecting product and creative plans to better reflect how customers live, shop and engage with the active category today,” said Dickson. “As we continue to rebuild Athleta, we have been focused on clearing less productive legacy product. We made progress in the first quarter. However, this process is taking longer than anticipated and put pressure on sales leading to a disappointing result.”

He added, ”For the second quarter, we remain focused on clearing the inventory so that we can begin to transition towards a cleaner assortment that better represents our go-forward aspirations for the brand in the fall.”

On the positive side, Dickson noted that Gauger has streamlined Athleta’s assortment “considerably” since taking over as president of the brand, resulting in better AUR (average unit retail) and margins despite the top-line pressures. He further told analysts, “She’s also been repositioning talent and filling in key roles in her organization. And as you could see on our website, if you take a look, we’re delivering a much better creative execution for the brand.”

On the product side, Athleta is seeing “some good reads” on newer products reaching stores.

He said, “As we have worked to clear, we also have been introducing new product at a smaller scale and have seen encouraging results. In the first quarter, our launch of the Journey travel collection in targeted locations saw a positive customer response, driving increased engagement and strong sell-through. We also saw momentum in new leg shapes across key franchises like our heritage Elation line. These early reads are helping to inform our product direction and where we are choosing to lean in further in the coming quarters.”

Dickson expects Athleta to show some improvement in the second half. He said, “We expect Q2 to be similar to Q1. But with all the work Maggie is doing, we feel very good about where we are and the work that they’re doing to impact the second half. We’ve embedded a slight improvement relative to the first half trend. Let’s see how the consumer responds. I will also sum up by saying Athleta remains an important brand in our portfolio, and we remain focused on rebuilding it for the long-term growth.”

Companywide, Gap Inc. delivered mixed fiscal first-quarter results, missing on the top line but beating on the bottom line. Earnings came in at 38 cents per share on an adjusted basis, versus 37 cents expected. Revenues were $3.50 billion, down from analysts’ consensus target of $3.52 billion.

Among its other banners, Old Navy was slightly below plan, the Gap banner topped expectations and Banana Republic was in line with plan.

Gap is now expecting companywide sales to grow between 1 percent and 2 percent, down from a prior range of between 2 percent and 3 percent. The company raised its EPS guidance to a range of $2.30 to $2.40, up from a prior range of $2.20 to $2.35.

“In the first quarter, Gap, Inc. delivered continued progress against our strategic priorities, including further market share gains and achieving our ninth consecutive quarter of positive comparable sales,” said President and CEO Richard Dickson. “Gap brand delivered a standout quarter with a double-digit comp, marking one of the brand’s strongest performances in over two decades. Performance across our other brands was varied, reflecting both the different stages of their transformation and some brand-specific dynamics.”

Dickson continued, “As we move forward, we remain focused on continuous improvement in our core business, while seeding growth accelerators to help amplify the reach and relevance of our portfolio over time. At the same time, we are increasing capital returns to shareholders, reflecting the growing strength of our balance sheet and our strong conviction in the long-term potential of the company.”

First Quarter Fiscal 2026 – Financial Results

• Net sales of $3.5 billion were up 1 percent compared to last year. Comparable sales were up 2 percent.

  • Store sales increased 3 percent compared to last year. The Company ended the quarter with nearly 3,500 store locations in about 35 countries, of which 2,477 were company-operated.

  • Online sales decreased 2 percent compared to last year and represented 38 percent of total net sales.

• Gross margin of 40.5 percent decreased 130 basis points versus last year, exceeding outlook.

  • Merchandise margin decreased 100 basis points versus last year, inclusive of an estimated net tariff impact of approximately 200 basis points. The underlying merchandise margin expansion was primarily driven by strength at the Gap brand and improved inventory management. Average unit retail increased across all brands.

  • Rent, occupancy, and depreciation (“ROD”) as a percent of sales deleveraged 30 basis points versus last year.

• Operating expense was $972 million and operating expense as a percent of net sales was 27.8 percent.

• Excluding a $313 million net gain related to a legal settlement and a concurrent $50 million charitable donation (the “non-recurring items”), adjusted operating expense was $1.2 billion and adjusted operating expense as a percent of net sales was 35.3 percent.

• Operating income was $445 million and operating margin was 12.7 percent.

• Adjusted operating income was $182 million and adjusted operating margin was 5.2 percent, excluding the net impact of non-recurring items.

• The effective tax rate was 24.7 percent and adjusted effective tax rate was 22.5 percent, which excludes the net impact of non-recurring items.

• Net income was $339 million and diluted earnings per share were $0.90.

• Adjusted net income was $145 million and adjusted diluted earnings per share were $0.38, excluding the net impact of non-recurring items.

Balance Sheet and Cash Flow Highlights

• Gap, Inc. ended the quarter with cash, cash equivalents and short-term investments of $2.6 billion, an increase of 15 percent from the prior year.

• Net cash from operating activities was $213 million at quarter-end, inclusive of the net impact of non-recurring items. Free cash flow, defined as net cash from operating activities less purchases of property and equipment, was $78 million.

• Ending inventory of $2.1 billion was flat compared to last year.

• Capital expenditures were $135 million.

• Old Navy: First quarter net sales of $2.0 billion were up 1 percent compared to last year. Comparable sales were up 1 percent. Old Navy continued to win in strategic categories, including denim, active, and kids and baby, while customer response to women’s dresses was weaker.
• Gap: First quarter net sales of $796 million were up 10 percent compared to last year. Comparable sales were up 10 percent. Gap continued to demonstrate culturally relevant storytelling that strengthened its presence in destination categories, including denim, fleece and kids and baby.
• Banana Republic: First quarter net sales of $431 million were up 1 percent compared to last year. Comparable sales were up 2 percent. The brand delivered its fourth consecutive quarter of positive comparable sales, with growth across men’s and women’s fueled by continued elevation in merchandising and storytelling.

Fiscal 2026 Outlook
The company’s outlook reflects a balanced approach, factoring in favorability from updated tariff assumptions while also taking into consideration potential uncertainties in the operating environment over the balance of the year.

The current outlook assumes a 10 percent tariff rate under Section 122 for inventory received after February 24, 2026 through July 24, 2026, followed by a reversion for the remainder of the year to the IEEPA-level tariff rates reflected in the Company’s prior outlook. This is expected to result in approximately $80 million of net tariff relief to gross profit and operating income, or approximately 50 basis points of benefit to gross margin and operating margin in fiscal 2026. The benefit is expected to be concentrated in the second and third fiscal quarters based on the timing of receipts. The Company is currently reserving the full estimated benefit to provide flexibility in managing the business through the remainder of the year, with approximately half intended to offset the potential impact of sustained elevation in fuel costs and the balance available to respond to potential changes in the promotional and competitive environment.

On a reported basis, the Company expects full year diluted earnings per share to be approximately $2.83 to $2.93, operating expense leverage, and operating margin expansion each including the impact of non-recurring items.

All fiscal 2026 outlook measures provided below exclude the net impact of non-recurring items.

Image, data and tables courtesy Gap Inc.