Gap Earnings Lift Outlook as Old Navy Weakens

Gap Inc. (GAP) reported second-quarter fiscal 2026 earnings showing softer sales but stronger profit after tariff recoveries boosted margins. The company raised full-year adjusted EPS guidance, returned capital to shareholders, and announced a leadership change at Old Navy, effective Nov. 2, 2026.

Tariff Recovery Supports Profit and Guidance

In a Form 8-K filed Aug. 27, 2026, Gap disclosed consolidated net sales of $3.651 billion for the quarter ended Aug. 1, down 2% year-over-year. Comparable sales declined 1%, with store sales falling 3% and online sales down 1%, the earnings press release showed.

The company recorded a $417 million adjustment to cost of goods sold tied to an International Emergency Economic Powers Act (IEEPA) tariff recovery, including $95 million in refunds and $5 million in interest income during the quarter. This tariff activity added 11.4 percentage points to reported gross margin, which rose to 52.8% from 41.2% a year earlier. Excluding the one-time impact, adjusted gross margin increased 0.2 percentage points to 41.4%.

Gap reported GAAP operating income of $676 million, more than doubling the prior year's $292 million, with an operating margin of 18.5%. Adjusted operating income was $259 million, with a 7.1% margin. GAAP net income reached $501 million, and GAAP diluted EPS was $1.38. Adjusted diluted EPS of $0.52 exceeded the company’s cited consensus range of roughly $0.48 to $0.51.

The company raised full-year adjusted EPS guidance by $0.05 at both ends to a range of $2.35 to $2.45 and narrowed fiscal 2026 net sales growth guidance to 1% to 1.5%. The guidance excludes the Q2 tariff refunds and interest income. Gap also reported returning $726 million to shareholders year-to-date through share repurchases and dividends, including $262 million in the quarter.

Brand Performance Diverges as Old Navy Sales Decline

At the brand level, the Gap namesake label posted a 10% increase in comparable sales, up from 4% a year earlier, with net sales rising to $844 million. The company highlighted ten consecutive quarters of positive momentum for the brand.

Old Navy weighed on overall results, with net sales of $2.1 billion and a 4% decline in comparable sales—the brand’s first negative same-store sales since Q2 2023. The company attributed the weakness partly to an unanticipated slowdown in traffic and seasonal assortment challenges.

Banana Republic recorded 3% comparable sales growth and net sales of about $478 million. Athleta’s comparable sales fell 12% after a 9% decline the prior year, with net sales of $264 million.

A separate transition press release disclosed that Michael Francis will become President and Chief Executive Officer of Old Navy effective Nov. 2, 2026. Haio (Horacio) Barbeito will step down from the operating role and transition to an Executive Advisor position through Jan. 30, 2027, becoming eligible for separation benefits under Gap’s Senior Executive Severance Plan. Francis joined Gap in March 2026 as chief customer officer for Old Navy and head of marketing shared services. His prior experience includes roles at Target, Walmart, and entertainment companies such as DreamWorks.