Gap outlines $150M–$175M tariff headwind for 2025 while reaffirming 1%–2% net sales growth outlook

Earnings Call Insights: Gap Inc. (GAP) Q2 2025

MANAGEMENT VIEW

* CEO Richard Dickson stated that "we are pleased to report second quarter results that over-delivered on our profit expectations and achieved our top line goals," noting six consecutive quarters of positive comp sales for the company and highlighting "significant gross margin expansion of 360 basis points to 41.2% in the second quarter versus the same period 2 years ago."
* Dickson emphasized the strength of Old Navy, Gap, and Banana Republic, with Old Navy delivering a 2% comp, Gap posting a 4% comp, and Banana Republic achieving a 4% comp in Q2, while Athleta experienced a challenging quarter and is undergoing a "purposeful reset year."
* Dickson announced the appointment of Maggie Gauger as the new President and CEO of Athleta, who previously held key leadership roles at Nike.
* Dickson cited brand reinvigoration efforts, strategic pursuit of core categories such as denim and active, and collaborations as key drivers of momentum, particularly at Old Navy and Gap.
* CFO Katrina O'Connell said, "our rigorous execution in the second quarter delivered solid results, surpassing our profit expectations and achieving our top line goals. The meaningful progress we're making across our strategic priorities continues to drive the business forward."
* O'Connell added, "we are reiterating our fiscal 2025 outlook of net sales up 1% to 2% and are updating our expectations for an operating margin of 6.7% to 7%, which includes our estimated net tariff impact of approximately 100 to 110 basis points."

OUTLOOK

* O'Connell reaffirmed, "we continue to expect net sales to be up 1% to 2% year-over-year. Our outlook assumes ongoing strength at Old Navy, Gap and Banana Republic and a longer recovery at Athleta."
* O'Connell provided guidance for gross margin, expecting it "to deleverage by approximately 70 to 90 basis points year-over-year driven by an estimated annual net tariff impact of approximately 100 to 110 basis points."
* For operating margin, O'Connell projected "operating margin of approximately 6.7% to 7% for the full year which includes an estimated net impact of approximately $150 million to $175 million or approximately 100 to 110 basis points to operating margin."
* The company expects third quarter net sales to be up 1.5% to 2.5% year-over-year.
* O'Connell stated, "we do not currently expect the annualization of tariffs in 2026 to cause further operating income declines next year. And we expect to mitigate the full impact of tariffs over time."

FINANCIAL RESULTS

* Gap reported net sales of $3.7 billion, flat year-over-year, with comparable sales up 1%.
* By brand, Old Navy net sales were $2.2 billion with a 2% comp, Gap $772 million with a 4% comp, Banana Republic $475 million with a 4% comp, and Athleta $300 million, down 11% with comparable sales down 9%.
* Gross margin was 41.2%, down 140 basis points versus last year. O'Connell attributed this primarily to "the lapping of last year's credit card benefit" and incremental actions for Athleta's reset.
* SG&A was $1.2 billion, or 33.4% of net sales, leveraging 130 basis points versus last year.
* Operating margin was 7.8%, down 10 basis points compared to last year.
* Earnings per share were $0.57, up 6% from last year's $0.54.
* The company ended the quarter with $2.4 billion in cash, cash equivalents, and short-term investments, an increase of 13% from last year.
* Gap returned $144 million to shareholders through repurchases and dividends and repurchased 3 million shares during the quarter for about $82 million.

Q&A

* Alexandra Ann Straton, Morgan Stanley, asked about the rationale for lowering EBIT and EPS guidance despite Q2 outperformance and about tariff mitigation. O'Connell responded that the biggest update is including "$150 million to $175 million worth of tariff impact," but "without the tariffs, we would actually be expanding both gross margin and operating margin for the full year."
* Marni Shapiro, The Retail Tracker, questioned if store improvements at Old Navy were more costly. Dickson replied, "we are not spending more in stores or in marketing. In fact, we're getting much more efficient and effective." Shapiro also asked about AUR at Gap, to which Dickson said, "the AUR is up, and it would be up without the collaborations."
* Brooke Siler Roach, Goldman Sachs, inquired about confidence in Gap through the holiday season. Dickson cited campaign momentum and said, "Better in Denim is the #1 search on TikTok."
* Matthew Robert Boss, JPMorgan, asked about revenue acceleration in Q3 and operating margin constraints for 2026. Dickson and O'Connell pointed to strong brand momentum and mitigation efforts for tariffs.
* Lorraine Corrine Maikis Hutchinson, BofA, asked about pricing assumptions and why tariff pressures won’t ramp into next year. O'Connell explained, "targeted pricing is one of the levers that we're using to mitigate tariffs" and clarified proactive mitigation for 2026.
* Dana Lauren Telsey, Telsey Group, sought comp drivers and marketing spend details. O'Connell said traffic was healthy and AUR was up, especially at Old Navy and Gap; Dickson noted, "we've been spending less and driving more effective results."
* Irwin Bernard Boruchow, Wells Fargo, asked about gross margin components. O'Connell specified that "credit card is somewhere in that 80 to 90 basis point range... we also then missed our expectations based on... Athleta."

SENTIMENT ANALYSIS

* Analysts' tone was generally neutral to slightly positive, with recurring questions focused on tariffs, margin outlook, and brand momentum, though some skepticism appeared regarding guidance decisions and tariff mitigation.
* Management maintained a confident tone in prepared remarks, emphasizing execution and brand momentum. In Q&A, O'Connell was measured and transparent, explaining tariff impacts and mitigation strategies, while Dickson was upbeat about brand progress.
* Compared to the previous quarter, analysts maintained a similar neutral-to-positive tone, but pressing more on tariff impact and guidance. Management’s confidence was consistent, though more defensive regarding tariff headwinds.

QUARTER-OVER-QUARTER COMPARISON

* Guidance for net sales growth remained at 1% to 2%, consistent with Q1.
* Operating margin outlook was updated to 6.7% to 7% for the year, now explicitly including $150 million to $175 million in tariff impact, whereas prior guidance separated tariff effects.
* Management’s strategic focus on brand reinvigoration and product categories like denim and active continued, with additional emphasis on cost discipline and efficiency gains.
* Analysts shifted focus more heavily to tariff mitigation and margin sustainability versus previous questions on supply chain and channel performance.
* Sentiment from both management and analysts remained confident but reflected heightened caution regarding external trade headwinds.

RISKS AND CONCERNS

* Tariffs and evolving trade policy represent a material headwind for the remainder of 2025, with an estimated net impact of $150 million to $175 million to operating income.
* Athleta’s ongoing reset and underperformance in Q2, with a 9% comp decline and 11% drop in net sales, were highlighted as significant challenges.
* Management cited efforts to mitigate tariff impacts through sourcing adjustments, pricing, and cost savings, but acknowledged the pressure on margins.
* Inventory levels increased 9% year-over-year due to accelerated receipts and higher costs from tariffs.

FINAL TAKEAWAY

Gap Inc. reported a solid second quarter, meeting top line goals and surpassing profit expectations while navigating a complex environment with new tariff headwinds. The company reaffirmed its 2025 net sales growth outlook of 1% to 2% and set an operating margin target of 6.7% to 7%, now inclusive of a $150 million to $175 million expected tariff impact. Strong brand performance at Old Navy, Gap, and Banana Republic offset continued weakness at Athleta, which is undergoing a strategic reset under new leadership. Management remains focused on sustaining momentum, driving efficiencies, and mitigating tariff risks, with clear confidence in the company’s brand reinvigoration strategy and long-term value creation potential.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/gap/earnings/transcripts]

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