The Gap, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Financial and Operational Rigor: Comparable sales were up 5% versus last year, the highest quarterly comp in over four years. Operating margin was 8.5%. Ended the quarter with strong cash balances of approximately $2.5 billion.
• Brand Reinvigoration: Old Navy had 6% comp sales growth, Gap 7% comp sales growth, and Banana Republic 4% comp sales growth. Old Navy saw strength in various categories and partnerships, Gap benefited from denim campaign and collaborations, Banana Republic progressed with fashion and storytelling. Athleta is in the early stages of reinvigoration.
• Supply Chain: Global network provides flexibility and resilience. Introduced automation and AI, increasing productivity by nearly 30%.
• Culture: United, motivated team focused on execution, carrying the company into the holiday season with a focus on winning with the consumer.

Segment Performance

• Old Navy: Net sales were $2.3 billion, up 5% versus last year with comparable sales up 6%. Gained market share over the last two years, with strength in kids, baby, denim, women's/girls, and active categories.
• Gap: Net sales of $951 million were up 6% versus last year, and comparable sales were up 7%. Marked the eighth consecutive quarter of positive comps, fueled by broad-based strength in denim and collaborations.
• Banana Republic: Net sales of $464 million were down 1% year over year with comparable sales up 4%. Progressing with brand reinvigoration, driven by men's and women's fashion and travel-oriented storytelling.
• Athleta: Net sales of $257 million decreased 11% versus last year and comparable sales were down 11%. In the early stages of reinvigoration, with a focus on long-term positioning.

Guidance

• Raised full-year 2025 net sales growth to the high end of the prior range.
• Raised full-year gross margin outlook, expecting deleverage of about 50 basis points year over year but underlying gross margin expansion of approximately 50 to 60 basis points versus last year.
• Full-year 2025 operating margin now expected to be about 7.2%, an increase from prior guidance.
• In 2026, expect tariff mitigation from sourcing, manufacturing, and assortments adjustments, with back half of 2026 turning to a tailwind.

Risks

• Tariffs: Impacting margins, though efforts to mitigate tariffs are ongoing.
• Macro Pressure: While Old Navy saw growth across income cohorts, macroeconomic pressure on the low-income consumer is a consideration.
• Athleta Recovery: Longer recovery needed for Athleta as it is in the early stages of reinvigoration.

Question and Answer

Q: Expand on strong comp acceleration at Gap banner and sustainable comp level.

A: Richard Dickson states Gap had a 7% comp sales growth, which is on top of 3% last year, representing the eighth consecutive quarter of positive comps. Driven by compelling product assortments, partnerships, and marketing, attracting younger and core consumers, with growth across all income cohorts.

Q: What surprised the upside of initial expectations on gross margin?

A: Katrina O'Connell mentions gross margin exceeded expectations due to lower discounting resulting in increased AUR growth from consumer response to relevant product and storytelling, offsetting some tariff pressure.

Q: Drivers of top line inflection at Old Navy?

A: Richard Dickson highlights Old Navy's 6% comp sales growth due to trend-right products, strategic category leadership, compelling storytelling, and partnerships like Disney and Anna Sui, with growth across all income cohorts.

Q: Store fleet assessment and investments?

A: Richard Dickson says stores are optimized, with closures of underperforming stores, testing new formats, and evaluating new store openings, with learnings from Gap Flatiron and Banana Republic refreshes being applied.

Q: Athleta inventory and sales stabilization timeline?

A: Katrina O'Connell notes Athleta's inventory aligned with lower sales trend, and Richard Dickson mentions Maggie Gauger is reorienting the brand with a focus on long-term positioning, taking time for reinvigoration.