Gap Inc.

08/28/2026 | Press release | Distributed by Public on 08/28/2026 10:06

Quarterly Report for Quarter Ending August 1, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations.
OUR BUSINESS
We are a house of iconic American brands offering apparel, accessories, and personal care products for men, women, and children under the Old Navy, Gap, Banana Republic, and Athleta brands. Our products are available to customers both in stores and online, through Company-operated and franchise stores, websites, and third-party arrangements. We have Company-operated stores in the United States, Canada, Japan, and Taiwan. We also have franchise agreements to operate Old Navy, Gap, Banana Republic, and Athleta throughout Asia, Australia, Europe, Latin America, and the Middle East. Under these agreements, third parties operate, or will operate, stores and websites that sell apparel and related products under our brand names. In addition to operating in the specialty, outlet, online, and franchise channels, we use our omni-channel capabilities to bridge the digital world and physical stores. The shopping experience is further enhanced by our omni-channel services, including buy online pick-up in store, order-in-store, and ship-from-store, as well as enhanced mobile-enabled experiences, which allow our customers to shop seamlessly across our brands and channels. Our brands have shared investments in supply chain and information technology, which allows us to optimize efficiency and responsiveness in our operations. Most of the products sold under our brand names are designed by us and manufactured by independent sources globally.
OVERVIEW
Financial results for the second quarter of fiscal 2026 are as follows:
•Net sales for the second quarter of fiscal 2026 decreased 2 percent compared with the second quarter of fiscal 2025.
•Gross profit for the second quarter of fiscal 2026 was $1.93 billion compared with $1.54 billion for the second quarter of fiscal 2025. Gross margin for the second quarter of fiscal 2026 was 52.8 percent compared with 41.2 percent for the second quarter of fiscal 2025. The second quarter of fiscal 2026 includes approximately $417 million of net IEEPA tariff recoveries.
•Operating income for the second quarter of fiscal 2026 was $676 million compared with $292 million for the second quarter of fiscal 2025.
•The effective income tax rate for the second quarter of fiscal 2026 was 26.3 percent compared with 27.0 percent for the second quarter of fiscal 2025.
•Net income for the second quarter of fiscal 2026 was $501 million compared with $216 million for the second quarter of fiscal 2025.
•Diluted earnings per share was $1.38 for the second quarter of fiscal 2026 compared with $0.57 for the second quarter of fiscal 2025.
We are focused on building momentum through the following strategic priorities:
•delivering financial and operational rigor, through an optimized cost structure and disciplined execution;
•building our brands to increase relevance, while we elevate our product and customer experience to drive sustainable growth;
•optimizing our platform to drive scale by advancing capabilities that amplify and enable our brands;
•strengthening our culture by developing talent and fostering a high-performance environment; and
•continuing to integrate sustainability into business practices to support long-term growth.
Our execution of these strategic priorities will position us to continue growing our core apparel business, while pursuing new strategic initiatives. We are expanding our beauty and accessories assortment, increasing customer engagement through our revamped loyalty program, and advancing technology capabilities throughout our organization.
Macroeconomic factors, including uncertainty surrounding global geopolitical instability, inflationary pressures, foreign currency fluctuations, and changes in interest rates, duties, tariffs, tax laws, and other restrictions as a result of government fiscal, monetary, trade, and tax policies, continue to create a complex and challenging retail environment.
In fiscal 2025, the United States enacted significant changes to its trade policy and imposed substantial tariffs on imported goods from most countries. In February 2026, the U.S. Supreme Court invalidated tariffs imposed under IEEPA, and subsequently, tariffs were imposed on a temporary basis pursuant to alternative statutory authority. These tariffs expired in July 2026 and were subsequently replaced by new tariffs under Section 301 of the Trade Act of 1974.
In April 2026, the U.S. Customs and Border Protection launched a platform for importers of record to submit claims for IEEPA tariff refunds that were previously collected. During the second quarter of fiscal 2026, we submitted claims for previously paid eligible tariffs and have received tariff refunds of approximately $95 million with the remaining $417 million recorded within other current assets on the Condensed Consolidated Balance Sheets. In addition, we received approximately $5 million of related interest. We are monitoring developments related to the refund process and assessing the timing and extent of additional recoveries.
Given the continued uncertainty surrounding global trade policy and broader macroeconomic conditions, we will continue to evaluate potential impacts on our business.
RESULTS OF OPERATIONS
Net Sales
See Note 2 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for net sales disaggregation.
Comparable Sales ("Comp Sales")
Comp Sales include the results of Company-operated stores and sales through our online channel. The calculation of Comp Sales excludes the results of our franchise and licensing business.
A store is included in the Comp Sales calculations when it has been open and operated by the Company for at least one year and the selling square footage has not changed by 15 percent or more within the past year. A store is included in the Comp Sales calculations on the first day it has comparable prior year sales. Stores in which the selling square footage has changed by 15 percent or more as a result of a remodel, expansion, or reduction are excluded from the Comp Sales calculations until the first day they have comparable prior year sales.
A store is considered non-comparable ("Non-comp") when it has been open and operated by the Company for less than one year or has changed its selling square footage by 15 percent or more within the past year.
A store is considered "Closed" if it is temporarily closed for three or more full consecutive days or it is permanently closed. When a temporarily closed store reopens, the store will be placed in the Comp/Non-comp status it was in prior to its closure. If a store was in Closed status for three or more days in the prior year, the store will be in Non-comp status for the same days the following year.
Current year foreign exchange rates are applied to both current year and prior year Comp Sales to achieve a consistent basis for comparison.
The percentage change in Comp Sales by global brand and for The Gap, Inc., as compared with the preceding year, is as follows:
13 Weeks Ended 26 Weeks Ended
August 1,
2026 		August 2,
2025 		August 1,
2026 		August 2,
2025
Old Navy Global (4) % 2 % (1) % 2 %
Gap Global 10 % 4 % 10 % 4 %
Banana Republic Global 3 % 4 % 2 % 2 %
Athleta Global (12) % (9) % (11) % (9) %
The Gap, Inc. (1) % 1 % - % 2 %
Store count, net openings/closings, and square footage for our stores are as follows:
January 31, 2026 26 Weeks Ended
August 1, 2026 		August 1, 2026
Number of
Store Locations
Net Number of Stores
Opened/(Closed)
Number of
Store Locations 		Square Footage
(in millions)
Old Navy North America 1,242 (1) 1,241 19.6
Gap North America 459 2 461 4.9
Gap Asia
123 4 127 1.1
Banana Republic North America 358 (9) 349 2.8
Banana Republic Asia 40 2 42 0.1
Athleta North America 252 (1) 251 1.0
Company-operated stores total 2,474 (3) 2,471 29.5
February 1, 2025 26 Weeks Ended
August 2, 2025 		August 2, 2025
Number of
Store Locations
Net Number of Stores
Opened/(Closed)
Number of
Store Locations 		Square Footage
(in millions)
Old Navy North America
1,249 (9) 1,240 19.6
Gap North America 453 - 453 4.8
Gap Asia
122 3 125 1.1
Banana Republic North America 380 (9) 371 3.1
Banana Republic Asia 42 - 42 0.1
Athleta North America 260 (5) 255 1.0
Company-operated stores total 2,506 (20) 2,486 29.7
Outlet and factory stores are reflected in each of the respective brands.
As of August 1, 2026 and August 2, 2025, the Company's franchise partners operated approximately 1,000 franchise stores.
Net Sales
Our net sales decreased $74 million, or 2 percent, during the second quarter of fiscal 2026 compared with the second quarter of fiscal 2025, primarily driven by a decrease in net sales at Old Navy Global and Athleta Global, partially offset by an increase in net sales at Gap Global.
Our net sales decreased $40 million, or 1 percent, during the first half of fiscal 2026 compared with the first half of fiscal 2025. While Comp Sales were flat, the decline was primarily due to incremental income in the first half of fiscal 2025 related to the revenue sharing arrangement from our credit card agreement.
Cost of Goods Sold and Occupancy Expenses
13 Weeks Ended 26 Weeks Ended
($ in millions) August 1,
2026 		August 2,
2025 		August 1,
2026 		August 2,
2025
Cost of goods sold and occupancy expenses $ 1,722 $ 2,189 $ 3,802 $ 4,204
Gross profit $ 1,929 $ 1,536 $ 3,346 $ 2,984
Cost of goods sold and occupancy expenses as a percentage of net sales
47.2 % 58.8 % 53.2 % 58.5 %
Gross margin 52.8 % 41.2 % 46.8 % 41.5 %
Cost of goods sold and occupancy expenses decreased 11.6 percentage points as a percentage of net sales in the second quarter of fiscal 2026 compared with the second quarter of fiscal 2025.
•Cost of goods sold decreased 12.2 percentage points as a percentage of net sales in the second quarter of fiscal 2026 compared with the second quarter of fiscal 2025, primarily driven by 11.4 percentage points, or approximately $417 million, of net IEEPA tariff recoveries. Additionally, there was a benefit from less promotional activity at Gap Global, partially offset by higher promotional activity at Old Navy Global primarily related to seasonal products. The net IEEPA tariff recovery reflects tariff refunds of approximately $512 million, partially offset by a commitment of appreciation of approximately $95 million for certain vendors.
•Occupancy expenses increased 0.6 percentage points as a percentage of net sales in the second quarter of fiscal 2026 compared with the second quarter of fiscal 2025, primarily driven by incremental cost related to our store population.
Cost of goods sold and occupancy expenses decreased 5.3 percentage points as a percentage of net sales in the first half of fiscal 2026 compared with the first half of fiscal 2025.
•Cost of goods sold decreased 5.7 percentage points as a percentage of net sales in the first half of fiscal 2026 compared with the first half of fiscal 2025, primarily driven by 5.8 percentage points, or approximately $417 million, of net IEEPA tariff recoveries. The net IEEPA tariff recovery reflects tariff refunds of approximately $512 million, partially offset by a commitment of appreciation of approximately $95 million for certain vendors.
•Occupancy expenses increased 0.4 percentage points as a percentage of net sales in the first half of fiscal 2026 compared with the first half of fiscal 2025, primarily driven by incremental cost related to our store population.
Uncertainty surrounding changes in U.S. trade policy and tariff rates since fiscal 2025 is contributing to overall macroeconomic volatility. The Company continues to evaluate the impact of U.S. trade policy and tariff rates on our cost of goods sold. Ongoing developments, including changes to tariff rates and refund processing, may continue to impact our gross margins in future quarters and may also impact comparability across periods. As a result of these ongoing dynamics, our gross margins for the second quarter of fiscal 2026 and first half of fiscal 2026 may not be indicative of our gross margins throughout the remainder of fiscal 2026.
Operating Expenses
13 Weeks Ended 26 Weeks Ended
($ in millions) August 1,
2026 		August 2,
2025 		August 1,
2026 		August 2,
2025
Operating expenses $ 1,253 $ 1,244 $ 2,225 $ 2,432
Operating expenses as a percentage of net sales 34.3 % 33.4 % 31.1 % 33.8 %
Operating margin 18.5 % 7.8 % 15.7 % 7.7 %
Operating expenses increased $9 million, or 0.9 percentage points as a percentage of net sales during the second quarter of fiscal 2026 compared with the second quarter of fiscal 2025, primarily driven by costs related to strategic investments.
Operating expenses decreased $207 million, or 2.7 percentage points as a percentage of net sales during the first half of fiscal 2026 compared with the first half of fiscal 2025, primarily due to the following:
•a gain of $313 million related to a credit card interchange fee litigation settlement, net of legal fees; partially offset by
•a $50 million charitable contribution made concurrently with the interchange fee litigation settlement; and
•costs related to strategic investments.
Interest Expense
13 Weeks Ended 26 Weeks Ended
($ in millions) August 1,
2026 		August 2,
2025 		August 1,
2026 		August 2,
2025
Interest expense
$ 24 $ 23 $ 46 $ 46
Interest expense primarily includes interest on outstanding borrowings and obligations mainly related to our Senior Notes and tax-related interest expense.
Interest Income
13 Weeks Ended 26 Weeks Ended
($ in millions) August 1,
2026 		August 2,
2025 		August 1,
2026 		August 2,
2025
Interest income
$ (28) $ (27) $ (55) $ (53)
Interest income primarily includes interest earned on our cash, cash equivalents, and short-term investments, as well as tax-related interest income and interest received on IEEPA tariff recoveries. Interest income increased slightly during the second quarter of fiscal 2026 compared with the second quarter of fiscal 2025 and during the first half of fiscal 2026 compared with the first half of fiscal 2025, primarily due to interest received on IEEPA tariff recoveries, partially offset by lower interest rates.
Income Taxes
13 Weeks Ended 26 Weeks Ended
($ in millions) August 1,
2026 		August 2,
2025 		August 1,
2026 		August 2,
2025
Income tax expense
$ 179 $ 80 $ 290 $ 150
Effective tax rate 26.3 % 27.0 % 25.7 % 26.8 %
The decrease in the effective tax rate for the second quarter of fiscal 2026 compared with the second quarter of fiscal 2025 is primarily due to the recognition of certain tax benefits associated with foreign entity structure changes in the prior quarter, as well as changes in the amount and mix of jurisdictional earnings.
The decrease in the effective tax rate for the first half of fiscal 2026 compared with the first half of fiscal 2025 is primarily due to more favorable impacts of share-based compensation, the recognition of certain tax benefits associated with foreign entity structure changes, as well as changes in the amount and mix of jurisdictional earnings.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity include cash and cash equivalents, short-term investments, and our ABL Facility. As of August 1, 2026, we had cash and cash equivalents of $2.10 billion and short-term investments of $382 million. We hold our cash, cash equivalents, and short-term investments across a diversified set of reputable financial institutions and monitor the credit standing of those financial institutions. In addition, we are also able to supplement near-term liquidity, if necessary, with our ABL Facility or other available market instruments. There were no borrowings under the ABL Facility as of August 1, 2026. See Note 3 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for disclosures on our debt and credit facilities.
Our largest source of operating cash flows is cash collections from the sale of our merchandise. Our primary uses of cash include merchandise inventory purchases, lease and occupancy costs, personnel-related expenses, purchases of property and equipment, shipping costs, and payment of taxes. In addition, we may have dividend payments and share repurchases. The seasonality of our operations, in addition to the impact of macroeconomic factors, may lead to significant fluctuations in certain asset and liability accounts as well as cash inflows and outflows between fiscal year-end and subsequent interim periods. These macroeconomic factors include uncertainty surrounding global geopolitical instability, inflationary pressures, foreign currency fluctuations, and changes in interest rates, duties, tariffs and related recoveries, tax laws, and other restrictions as a result of government fiscal, monetary, trade, and tax policies.
We believe our existing balances of cash, cash equivalents, and short-term investments, along with our cash flows from operations, and instruments mentioned above, provide sufficient funds for our business operations as well as capital expenditures, dividends, share repurchases, and other liquidity requirements associated with our business operations over the next 12 months and beyond.
Cash Flows from Operating Activities
Net cash provided by operating activities increased $242 million during the first half of fiscal 2026 compared with the first half of fiscal 2025, primarily due to the following:
Net Income
•an increase in net income of $431 million;
Changes in operating assets and liabilities
•an increase of $117 million related to merchandise inventory primarily due to timing of receipts and higher inventory cost during the first half of fiscal 2025; partially offset by
•a decrease of $445 million related to other current assets and other long-term assets primarily due to a tariff refund receivable included in other current assets on the Condensed Consolidated Balance Sheets.
Cash Flows from Investing Activities
Net cash used for investing activities increased $121 million during the first half of fiscal 2026 compared with the first half of fiscal 2025, primarily due to $108 million more purchases of property and equipment during the first half of fiscal 2026 compared with the first half of fiscal 2025.
Cash Flows from Financing Activities
Net cash used for financing activities increased $485 million during the first half of fiscal 2026 compared with the first half of fiscal 2025, primarily due to $449 million more repurchases of common stock during the first half of fiscal 2026 compared with the first half of fiscal 2025.
Free Cash Flow
Free cash flow is a non-GAAP financial measure. We believe free cash flow is an important metric because it represents a measure of how much cash a company has available for discretionary and non-discretionary items after the deduction of capital expenditures. We require regular capital expenditures to build and maintain our stores and distribution centers and for technology investments. We use this metric internally, as we believe our sustained ability to generate free cash flow is an important driver of value creation. However, this non-GAAP financial measure is not intended to supersede or replace our GAAP results.
The following table reconciles free cash flow, a non-GAAP financial measure, from a GAAP financial measure.
26 Weeks Ended
($ in millions) August 1,
2026 		August 2,
2025
Net cash provided by operating activities (1) $ 550 $ 308
Less: Purchases of property and equipment (289) (181)
Free cash flow $ 261 $ 127
__________
(1)For the 26 weeks ended August 1, 2026, net cash provided by operating activities includes the impact of a pre-tax gain of $313 million related to a credit card interchange fee litigation settlement, net of legal fees, and a $50 million pre-tax charitable contribution made concurrently during the first quarter of fiscal 2026.
Dividend Policy
In determining whether and at what level to declare a dividend, our Board considers a number of factors including sustainability, operating performance, liquidity, and market conditions.
We paid a dividend of $0.175 per share during the second quarter of fiscal 2026. In August 2026, the Board authorized a dividend of $0.175 per share for the third quarter of fiscal 2026.
Share Repurchases
Certain information about the Company's share repurchases is set forth in Note 6 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Summary Disclosures about Contractual Cash Obligations and Commercial Commitments
There have been no material changes to our contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K as of January 31, 2026, other than those which occur in the normal course of business. See Note 9 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for disclosures on commitments and contingencies.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2026. See Note 1 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for disclosures on accounting policies.
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