Gap Inc.: Old Navy Stumbles, But Portfolio Diversifies and Margin Glows
Gap brand's double-digit momentum and a tariff windfall offset Old Navy's seasonal miss, prompting a leadership change and a raised profit outlook.
GAP · Earnings Call · 2026-08-27
The Tale of Two Brands
Gap Inc. opened its fiscal second quarter with an honest admission: “we delivered a net sales decline of 2% with mixed performance on the top line across the portfolio.” — Richard Dickson, Executive · 2026-08-27 Yet within that mixed bag, the portfolio's divergence is stark. While Old Navy — the company's largest brand — stumbled to a 4% comp decline on a seasonal assortment misfire and a traffic shortfall, the Gap brand delivered another standout quarter, with “comparable sales increasing 10%” — Richard Dickson, Executive · 2026-08-27 and an 11th consecutive quarter of positive comps. Banana Republic posted its fifth straight positive quarter with a 3% comp, and Athleta remained challenged, down 12%. The Old Navy troubles are not new — management had pre-flagged weakness in dresses and summer categories as far back as the prior call. But the magnitude of the miss and the accompanying traffic slowdown heightened the urgency. As CEO Richard Dickson explained, “the headwind from summer categories becomes much less significant” — Richard Dickson, Executive · 2026-08-27 in Q3, as denim, active, sweaters, and knits take over. The company is also leaning into new initiatives like Old Navy Sport, a beauty rollout, and a Cardi B–fronted denim campaign that has become the brand's most-viewed marketing effort.Leadership Transition and the Growth Accelerators
A notable change is the announced leadership transition at Old Navy. Richard Dickson stated, “we are advancing a planned leadership transition with the appointment of Michael Francis as Old Navy's new Brand President and CEO, succeeding Haio Barbeito, effective Monday, November 2.” — Richard Dickson, Executive · 2026-08-27 This move signals a decisive push to institutionalize the playbook that has worked so well at Gap. Meanwhile, the company is seeding longer-term growth in beauty and accessories — growth accelerator categories that remain small today but are expected to scale by 2027. The contrast between Old Navy and Gap is instructive. While Old Navy's seasonal categories dragged, Gap's broad-based strength in denim and fleece, coupled with culturally relevant collaborations, continues to fuel customer file growth. As prior quarter commentary noted, “the brand's momentum is giving us the confidence to also accelerate the rollouts of our new store formats.” — Richard Dickson, Chief Executive Officer · 2025-11-20 That confidence is now being matched by tangible investments in stores, technology, and supply chain.Tariff Refunds and Margin Discipline
The quarter's profitability highlight was a gross margin beat. Adjusted gross margin rose 20 basis points to 41.4%, with merchandise margin up 80 bps — helped by tariff refunds and disciplined pricing. CFO Katrina O'Connell detailed the updated tariff assumptions:This, combined with the $40 million reserve for promotional flexibility, allowed the team to fund the Old Navy markdowns while still expanding margins. This margin strength is also visible in the fundamentals: the company's gross margin has hovered in the low-40s range, up from the mid-30s in the pre-recovery period. The resilience supports management's decision to raise the full-year adjusted operating margin outlook to 7.4%–7.6% and EPS to $2.35–$2.45, despite the narrowed revenue guidance of 1%–1.5%.We are now extending that 10% assumption through the end of August, which provides approximately $15 million of incremental net tariff relief to the year, which will be realized primarily in the fourth quarter.