The Gap, Inc. (GAP) Earnings

Management highlights

### Overall Transformation Progress - Delivered 9 consecutive quarters of positive comparable sales, with 3 out of 4 brands growing in Q1 2026, and gained overall U.S. apparel market share. - Outperformed gross margin expectations, driven by operational and financial discipline, while continuing to invest in long-term growth initiatives. - Deployed capital strategically, increasing both share repurchases and dividend payouts to shareholders, while maintaining a strong balance sheet with $2.6 billion in cash/short-term investments at quarter end. ### Brand-Specific Operational Updates - Old Navy: Maintained top 3 market positions in denim and kids/baby, gained share in denim, and was the only top 5 activewear brand to hold share. Weakness stemmed from misaligned assortment and value proposition in women's seasonal categories (dresses, swim, shorts); mid-May assortment and pricing adjustments have driven early improvement. Appointed Michael Francis as new Chief Customer Officer to strengthen customer connection, will roll beauty to all stores by end of 2026, and is launching a sports licensing partnership with Fanatics in H2 2026. - Gap: Delivered 10 consecutive quarters of positive comps (10% in Q1 2026 on top of 5% prior year), achieved 3 consecutive quarters of reduced discounting, and returned kids/baby to growth. Drove strong cultural engagement via Coachella activation, the Young Miko fleece campaign, and high-profile collaborations, and plans to remodel ~30 stores in 2026, reaching ~25% of the North America specialty fleet converted to the new concept by year end. - Banana Republic: Delivered 4 consecutive quarters of positive comps, with balanced growth across men's and women's driven by improved merchandising and brand storytelling. Appointed Donald Kohler as new President and CEO after completing the "Fix the Fundamentals" turnaround stage. - Athleta: In a 2026 rebuild year under new president Maggie (joined August 2025). Clearing legacy inventory is taking longer than expected, pressuring Q1 sales, but new small-batch product launches (Journey Travel Collection, updated Heritage Elation line) have delivered positive early customer response and strong sell-through that is informing future product direction. ### Strategic Growth Initiatives - Beauty & Accessories: 2026 is a test-and-learn year. Old Navy will roll out beauty to all stores in H2 2026 following a successful 150-store pilot, with a mix of owned and third-party products. Gap will relaunch its iconic heritage fragrance line summer 2026, and launch a new Gap accessories collection in fall 2026. - Platform & Technology Investments: Relaunched the Encore loyalty program, converting 40 million existing customers to an engagement-focused platform. Leveraging AI and data for product intelligence (merchandising, inventory allocation) and improved customer experience, including a new AI-powered shopping partnership with Google Gemini, to drive productivity without expanding cost structure.

Guidance

- Full-year 2026 net sales growth guidance revised down to 1% to 2% (from prior expectations), driven by a moderated outlook for Old Navy. Old Navy full-year comparable sales are now expected to be flat to up 1%, Gap full-year comps are expected to be high single digits, Banana Republic is expected to deliver comp growth in line with prior outlooks, and Athleta is expected to see continued sales pressure through Q2 with a slower-than-expected rebuild. - Full-year adjusted operating margin guidance maintained at 7.3% to 7.5% (up from 7.3% in 2025), and full-year gross margin is expected to be flat to slightly up year-over-year. - Full-year adjusted earnings per share guidance raised to $2.30 to $2.40, representing 8% to 12% YoY growth, driven by better-than-expected interest income, a favorable tax outlook, and reduced share count from repurchases. - Full-year capital expenditure guidance maintained at ~$650 million, focused on stores, technology, and supply chain. Adjusted SG&A as a percentage of sales is expected to be roughly flat YoY, with $150 million in planned cost savings funding growth initiatives and offsetting inflation. - Q2 2026 net sales are expected to be flat to down 1% YoY, with Old Navy comps projected to be down low single digits. Gross margin is expected to be flat to down 50 basis points YoY, and SG&A as a percentage of sales is expected to deleverage 110 to 120 basis points due to timing of growth investments. - The $80 million (50 basis point) net tariff margin benefit from lower post-ruling rates is reserved as a buffer: half to offset sustained elevated fuel costs, half for potential pricing flexibility if promotional competition intensifies, creating potential upside to guidance if those risks do not materialize. No potential tariff refunds from prior periods are included in current guidance.

Segment performance

Total company net sales for Q1 2026 were $3.5 billion, a 1% year-over-year increase, with comparable sales up 2% (9th consecutive quarter of positive comps). - Old Navy: Net sales of $2 billion, +1% YoY; comparable sales up 1%. Contributes ~57.1% of total company net sales. - Gap: Net sales of $796 million, +10% YoY; comparable sales up 10%. Contributes ~22.7% of total company net sales. - Banana Republic: Net sales of $431 million, +1% YoY; comparable sales up 2%. Contributes ~12.3% of total company net sales. - Athleta: Net sales of $270 million, -12% YoY; comparable sales down 11%. Contributes ~7.7% of total company net sales.

Risks & headwinds

- Product assortment misexecution, as seen in Old Navy's Q1/Q2 2026 seasonal categories, can lead to near-term sales underperformance and requires promotional adjustment to clear inventory. - Athleta's legacy inventory clearing process is taking longer than expected, extending sales pressure into the second quarter and delaying the launch of the repositioned brand assortment. - Geopolitical tensions have pushed fuel costs higher, creating upward pressure on operating expenses. - The promotional environment could intensify as competitors deploy tariff savings into price cuts, pressuring industry margins. - Tariff rates are scheduled to revert to higher IEPA levels after the Section 122 temporary rate expiration in July 2026, creating potential margin headwinds if the reimposition happens as expected. - Outcome of potential refunds for previously paid tariffs is uncertain, as Gap has not yet been included in the first phase of the refund review process. - Consumer behavior could shift meaningfully from current resilient trends due to broader macroeconomic uncertainty, impacting full-year sales performance.

Analyst Q&A

• Q: What is the timeline to right-size Old Navy's assortment, has Gap seen sequential Q2 softening, and when will Athleta finish inventory optimization? /

  A: Old Navy delivered 6 consecutive positive quarters, with strength in core categories (active, denim, kids/baby) but weak performance in seasonal categories like dresses. Mid-May assortment and pricing adjustments have driven early improvement, with weakness expected to fade in H2 2026 as seasonal categories become a smaller share of revenue and new initiatives (full-store beauty rollout, Fanatics partnership) launch. Gap continues to see consistent strong growth across all categories with no sequential softening, maintaining momentum from Q1's 10% comp growth. Athleta's rebuild is on track, with Q2 expected to perform similarly to Q1, and slight improvement is projected for H2 as legacy inventory clears and new product rolls out.

• Q: Is Old Navy's Q1 weakness driven by macro factors or internal assortment issues, and what explains Q1's channel mix (store up 3%, online down 2%)? /

  A: Old Navy's weakness is entirely internal, not macro: the brand is still winning across all income cohorts, and consumer demand is consistent when the right product/value equation is delivered. Weakness is limited to seasonal categories (primarily dresses) where the assortment and pricing missed customer expectations. The Q1 online decline is driven by two specific factors: Athleta (the most digitally-penetrated brand) had weaker Q1 sales, and dresses (which over-index to online sales) underperformed at Old Navy; overall online traffic still grew in the quarter.

• Q: What caused the Old Navy dress assortment miss, and what changes are being made for future seasons? /

  A: Fashion is an inherently dynamic business, and the team simply failed to deliver the expected fashion and value equation for this seasonal category, with similar weakness seen in other spring seasonal categories (swim, shorts). The team has quickly adjusted pricing and messaging, and trends have started to improve. The company is documenting learnings from the miss to inform future assortment planning, but core categories remain strong and the company expects improvement in H2.

• Q: How large are Old Navy's seasonal weak categories, and what is Gap Inc's beauty go-to-market strategy? /

  A: Seasonal categories are not the largest part of Old Navy's business, and the company's strategic focus for years has been growing core categories (active, denim, kids/baby) that remain strong. Seasonal categories will represent a much smaller share of revenue after Q2. Beauty is a large underpenetrated opportunity for apparel retailers (can represent 5-20% of sales for peer brands), and Gap Inc is taking a deliberate, phased approach. Old Navy will roll out a mix of owned and third-party beauty to all stores in 2026 following a successful pilot, while Gap will relaunch its iconic heritage fragrance line in summer 2026 with updated product, packaging, and merchandising.