Gap, Inc. reported Athleta’s same-store sales slumped 9 percent, again missing plan amid heavy markdowns. During Gap Inc.’s analyst call, Gap officials expressed optimism that the recent hiring of Maggie Gauger, a longtime Nike veteran, as Athleta’s president would support a turnaround, while also stressing that the reset will take time.

“At Athleta, we’re disappointed in the second quarter performance,” said Gap, Inc.’s Chief Executive Officer, Richard Dickson. “As we shared last quarter, we’re approaching 2025 as a purposeful reset year. Although we saw bright spots in key items like sports bras and shorts in the quarter, the broader assortment simply isn’t aligned with what the Athleta customer expects.”

He added, “We continue to believe that this brand has great potential. We moved away, if you will, from the distinctive performance roots that the brand was known for. We’re now going to get back into that spirit with Maggie Gauger, who we hired from Nike, a 20-year veteran. She has hit the ground running, only been there for three weeks, but I can tell you the energy is palpable.”

Gauger was, most recently, the head of Nike’s North American women’s business. She was hired in July, marking the third top executive to lead the brand in the last two years.

Dickson said, “Her extensive background across retail, strategy, merchandising, and product creation, in addition to her experience reinvigorating underperforming segments at Nike and her deep alignment with Athleta’s purpose are all qualities that will help us stabilize the brand and ultimately put it on a path to growth.”

The 9 percent same-store decline in the quarter builds on a 4 percent decline in the year-ago quarter and an 8 percent drop in the first quarter. Athleta’s second-quarter net sales declined 11 percent to $300 million.

The steeper net decline versus comps reflects store closures. Athleta operated 300 stores at the end of the latest quarter, down from 338 a year ago. The banner’s U.S. store count was reduced to 290 from 327 the previous year. Athleta had 9 stores in Canada, down from 10 the previous year.

Katrina O’Connell, Gap’s CFO, also noted that Athleta had to absorb extensive markdowns in the quarter to clear inventories that pressured Gap, Inc.’s overall margins. She said about Athleta, “We had to go pretty deep in discounting, given the challenging sales performance, as we had to clear the product that didn’t resonate with consumers.”

Looking ahead, Dickson was cautious about Athleta showing improvement in the near term. He said about Athleta, “Headed into the back half, we are maintaining a disciplined approach, lowering inventory and tightening our mix to products that are resonating. As we shared last quarter, the brand’s reset will take time, but we’re approaching it with intention and focus. We believe in Athleta’s potential in the women’s active category and are confident that under Maggie’s leadership, Athleta can reemerge as a purpose-led brand, poised to matter even more through product, trend and narratives that women deeply connect with.”

Among Gap’s other banners, Active was a standout category at Old Navy, supported by innovations featuring StudioSmooth and Bounce Fleece, as well as a marketing campaign featuring actress Lindsay Lohan.

Dickson said, “Old Navy’s active business continued to grow in the second quarter and is positioned as the #5 brand in the active category. The growth was fueled by our first major active campaign in years, “Old Navy. New Moves,” featuring Lindsay Lohan, with women’s product really resonating.”

Gap’s overall sales of $3.7 billion were flat compared to last year and slightly below analysts’ sales estimate of $3.74 billion.

Comparable sales were up 1 percent year-over-year. Same-store sales grew 2 percent at Old Navy, also boosted by strength in the denim category. Same-store sales rose 4 percent at both the flagship Gap chain and Banana Republic.

Store sales decreased 1 percent compared to last year, while online sales increased 3 percent to represent 34 percent of total sales.

Gross margin of 41.2 percent decreased 140 basis points versus last year. Merchandise margin fell 150 basis points versus last year, primarily driven by lapping the benefit of incremental sales in the second quarter of fiscal 2024 relating to the company’s revenue-sharing agreement with its credit card partner.

Operating income remained relatively flat at $292 million, compared to $293 million a year ago. Earnings improved 4.9 percent $216 million, or 57 cents a share, from $206 million, or 54 cents, a year ago. Analysts’ consensus target was 55 cents.

Looking ahead, Gap now expects a $150 million to $175 million tariff impact on its fiscal 2025 operating income, which translates to a 100- to 110-basis-point impact on operating margin. When the company reported results in May, it expected tariffs to cost between $100 million and $150 million on a net basis.

The company’s full-year operating margin is expected to be between 6.7 percent and 7 percent, down from 7.4 percent in the previous fiscal year, reflecting the impact of tariffs. The company reaffirmed its fiscal 2025 net sales growth outlook and is continuing to expect revenue to grow between 1 percent and 2 percent.

For the third quarter, Gap expects growth in the range of 1.5 percent to 2.5 percent. Gross margins are expected to decline by 150 to 170 basis points, including an estimated 200 basis points of net tariff impact.

Images courtesy Athleta