Old Navy's Seasonal Miss Tests Gap Inc.'s Transformation

Gap brand shines, but Old Navy's dress misstep and Athleta's slow rebuild pressure the portfolio; management raises EPS on buybacks and tariff relief.

GAP · Earnings Call · 2026-05-28

A Quarter of Contrasts

The first quarter of fiscal 2026 was a study in contrasts for Gap Inc. The company delivered its ninth consecutive quarter of positive comparable sales, with overall comps up 2% on top of last year's 2%, and gross margin of 40.5% came in ahead of guidance. Yet the brand-level story was far from uniform. Gap brand was the standout, with a 10% comp, while Old Navy grew just 1% and Athleta fell 11%. As CEO Richard Dickson put it, “we are not seeing this as a consumer issue. We actually see consistency and strength in our customer behavior.” — Richard Dickson, Executive (likely CEO or President) · 2026-05-28 The miss at Old Navy is the quarter's defining event, forcing management to take a seasonal category miss head-on.

Old Navy: The Seasonal Miss

The company moderated its full-year sales outlook to 1-2% growth, primarily reflecting a tempered view of Old Navy, now expected to deliver flat to up 1% comps. The issue is not the customer, Dickson emphasized, but rather the right fashion and value equation. In dresses, "we just did not have the right fashion and value equation," he admitted, pointing to a weaker start in swim and shorts as well. The team is already working on sharp price points and stronger messaging, with some improvement seen by mid-May. The seasonal weakness is expected to persist through Q2, with Old Navy comps projected down low single digits in the second quarter, but the back half should benefit from a stronger denim and active mix, plus new initiatives like the Fanatics sports licensing partnership and a full-fleet beauty rollout.

Gap Brand: The Culturally Relevant Engine

In contrast, Gap brand delivered an exceptional quarter: comps up 10%, its tenth consecutive positive quarter. The brand's cultural relevance is resonating, from the "Sweats Like This" music video with Young Miko to the Coachella Hoodie House activation. Dickson highlighted the launch of new collaborations and the upcoming fragrance relaunch as fuel for continued momentum. This offset some of the portfolio's drag, but not enough to offset the Old Navy adjustment.

Gap is back on the forefront of the cultural conversation. It is clearly on a roll as an iconic American brand.
Richard Dickson, Executive (likely CEO or President) · 2026-05-28

Financial Maneuvering and Capital Returns

CFO Katrina O'Connell explained that the quarter included a $300 million legal settlement net gain, inflating reported operating income to 12.7% (5.2% adjusted). Gross margin declined 130bps to 40.5%, but this included a 200bps tariff headwind, implying 100bps of underlying expansion. Looking forward, the company now expects roughly $80 million of net tariff relief. “We are now expecting approximately $80 million or 50 basis points of year over year net tariff relief to our gross and operating margin relative to our prior outlook.” — Katrina O'Connell, Executive (likely CFO or similar financial role) · 2026-05-28 This, combined with a lower share count from aggressive repurchases, allows management to raise full-year adjusted EPS guidance to $2.30-$2.40 despite lower sales. The company repurchased $400 million of stock in Q1, a 473% increase year-over-year, and raised its dividend by 6%. This aggressive capital return is a deliberate shift, echoing the company's prior commitment to “building momentum” — Richard Dickson, Chief Executive Officer · 2026-03-05 and “our strategy is working and it is showing up in the momentum that we're seeing in our results.” — Richard Dickson, Chief Executive Officer · 2025-11-20 Yet the stock has fallen ~25% over the last 90 days, reflecting investor skepticism about Old Navy's trajectory and Athleta's slow turnaround. Gross margin of 40.5% was down 130 basis points, with a 200 basis point tariff headwind implying 100 basis points of underlying improvement. The path forward hinges on Old Navy's back-half execution, Gap's continued cultural relevance, and the scaling of growth accelerators like beauty and sports licensing. The company is also reserving tariff relief as a buffer against fuel costs and promotional pressure. With a strong balance sheet and a clear capital allocation framework, Gap Inc. has the tools to navigate its uneven portfolio, but the market is watching for proof that Old Navy's miss is a seasonal blip, not a structural shift.