Gap Inc. Reports Second Quarter Fiscal 2026 Results (Form 8-K)

Gap Inc. Reports Second Quarter Fiscal 2026 Results

Net sales down 2% compared to last year; comparable sales down 1%

Exceeded reported and adjusted operating margin expectations

Returned $726 million to shareholders through share repurchases and dividends year-to-date

Provides updated outlook for full year while raising earnings per share outlook

Company separately announces Michael Francis as Old Navy's next President and CEO, succeeding Haio Barbeito

"While top-line results in the second quarter were modestly below expectations, continued operational and financial rigor contributed to gross margin strength resulting in the Company exceeding profit expectations," said President and Chief Executive Officer, Richard Dickson.

"We are particularly proud of the momentum at the Gap brand, which posted another quarter of double-digit comparable sales. We have work to do at Old Navy, but we have a clear understanding of the factors that impacted performance and are taking targeted actions that are already driving improved results. We remain focused on disciplined execution and performing while we transform in order to win in the second half," Dickson continued.

Second Quarter Fiscal 2026 - Financial Results

•Net sales of $3.7 billion were down 2% compared to last year. Comparable sales were down 1%.

•Store sales decreased 3% compared to last year. The Company ended the quarter with nearly 3,500 store locations in about 35 countries, of which 2,471 were Company-operated.

•Online sales decreased 1% compared to last year and represented 35% of total net sales.

•Gross margin of 52.8% increased 1,160 basis points versus last year on a reported basis including 1,1401 basis points of net benefit related to the expected recovery of tariffs imposed under the International Emergency Economic Powers Act ("IEEPA") (the "net

1 Represents the impact of IEEPA tariff refunds of approximately $512 million, partially offset by a commitment of appreciation of approximately $95 million for certain vendors.

IEEPA tariff recovery"). Adjusted gross margin excluding this benefit was 41.4% and increased 20 basis points versus last year.

•Merchandise margin increased 1,220 basis points versus last year on a reported basis. Adjusted for the net IEEPA tariff recovery, merchandise margin increased 80 basis points including the benefit from tariff mitigation strategies with the underlying expansion primarily driven by strength at the Gap brand, partially offset by higher promotional activity at Old Navy. Average unit retail increased across all brands.

•Rent, occupancy, and depreciation ("ROD") as a percent of sales deleveraged 60 basis points versus last year.

•Operating expense was $1.3 billion or 34.3% of net sales.

•Operating income was $676 million and operating margin was 18.5%.

•Adjusted operating income was $259 million and adjusted operating margin was 7.1%, excluding the net IEEPA tariff recovery.

•The effective tax rate was 26.3% and adjusted effective tax rate was 26.4%, which excludes the tax impact of the net IEEPA tariff recovery and related interest income.

•Net income was $501 million and diluted earnings per share were $1.38.

•Adjusted net income was $190 million and adjusted diluted earnings per share were $0.52, excluding the net IEEPA tariff recovery and related interest income.

•Diluted weighted average shares were 362 million.

Balance Sheet and Cash Flow Highlights

•Ended the quarter with cash, cash equivalents and short-term investments of $2.5 billion, an increase of 2% from the prior year.

•Year-to-date net cash from operating activities was $550 million. Free cash flow, defined as net cash from operating activities less purchases of property and equipment, was $261 million year-to-date.

•Ending inventory of $2.3 billion was flat compared to last year.

•Capital expenditures were $289 million year-to-date.

Shareholder Returns

•Returned $262 million of cash to shareholders in the form of share repurchases and dividends during the second quarter of fiscal 2026.

•Share Repurchases:

◦In the second quarter, the Company completed its previously announced $200 million accelerated share repurchase program ("ASR"). Following the initial delivery of 6.9 million shares in the first quarter, the Company received an additional 1.4 million shares in May, resulting in aggregate repurchases under the program of 8.3 million shares.

◦In addition to the ASR, repurchased 9.3 million shares in the open market for $200 million during the second quarter.

◦The Company has $399 million remaining under its existing share repurchase authorization.

•Dividends:

◦Paid $62 million in dividends during the second quarter of fiscal 2026, reflecting a quarterly dividend of $0.175 per share, up 6% from the prior year.

◦The Company's Board of Directors approved a third quarter fiscal 2026 dividend of $0.175 per share.

•Year-to-date, the Company has returned $726 million to shareholders inclusive of $125 million in the form of dividends and $601 million of share repurchases.

Additional information regarding adjusted gross margin, adjusted operating income, adjusted operating margin, adjusted effective tax rate, adjusted net income, adjusted diluted earnings per share, and free cash flow, which are non-GAAP financial measures, is provided at the end of this press release along with reconciliations of these measures from the most directly comparable GAAP financial measures for the applicable period.

Second Quarter Fiscal 2026 - Global Brand Results

Comparable Sales:

			Q2 2026						Q2 2025
Old Navy			(4)		%				2		%
Gap			10		%				4		%
Banana Republic			3		%				4		%
Athleta			(12)		%				(9)		%
Gap Inc.			(1)		%				1		%

Old Navy:

•Second quarter net sales of $2.1 billion were down 4% compared to last year. Comparable sales were down 4% reflecting expected pressure in the women's seasonal assortment, in addition to an unanticipated slowdown in traffic.

Gap:

•Second quarter net sales of $844 million were up 9% compared to last year. Comparable sales were up 10%, with the brand's focus on big ideas and culturally relevant storytelling continuing to drive strong performance in destination categories including denim, fleece, and kids and baby.

Banana Republic:

•Second quarter net sales of $478 million were up 1% compared to last year. Comparable sales were up 3%. Performance was balanced across both men's and women's as the brand continued to make progress in strengthening its assortment, supported by more distinctive marketing and brand storytelling.

Athleta:

•Second quarter net sales of $264 million were down 12% compared to last year. Comparable sales were down 12%. Athleta remains focused on disciplined execution to rebuild the brand profitably.

Tariff Update

In the second quarter, the Company recorded a $417 million adjustment to cost of goods sold related to the net IEEPA tariff recovery. The Company received refunds of $95 million and related interest income of $5 million in the second quarter of 2026, with the remaining refunds and related interest income expected in the third quarter. The Company's adjusted outlook excludes the impact of the refunds.

Following the Section 301 announcement in July, the Company updated its tariff rate assumptions to incorporate a roughly 10% incremental rate from July 24, 2026 through the end of August reflecting the rates currently in place. The prior outlook assumed an incremental high-teens rate beginning July 24, 2026. This update is expected to provide approximately $15 million of net tariff relief to full-year gross profit and operating income, or approximately 10 basis points of benefit to full-year gross margin and operating margin. The benefit is expected to be concentrated in the fourth quarter based on the timing of receipts and is reflected in the Company's current outlook.

Fiscal 2026 Outlook

The Company's outlook reflects a balanced approach, factoring in visibility into the consumer and broader macroeconomic and geopolitical environment in the near term which is largely unchanged, while recognizing potential uncertainties moving forward around energy prices and U.S. tariffs.

The Company's updated full-year net sales outlook of up 1% to 1.5% now assumes Old Navy comparable sales of flat to down 1%, compared with the prior range of flat to up 1%, reflecting the brand's second-quarter performance. Comparable sales at the Gap brand are now expected to grow in the high-single to low double-digit range, compared with prior expectations of up high-single digits, while expectations for the balance of the portfolio remain unchanged.

On a reported basis, the Company now expects full year diluted earnings per share to be approximately $3.77 to $3.87.

The Company's outlook below is provided on an adjusted, non-GAAP basis.

Full Year Fiscal 2026

Current FY 2026 Outlook

Prior FY 2026 Outlook

FY 2025 Results1

Net sales

Up 1% to 1.5% year-over-year

Up 1% to 2% year-over-year

$15.4 billion

Adjusted gross margin

Up slightly year-over-year

Flat to up slightly year-over-year

40.8%

Adjusted operating expense (% of net sales)

About flat year-over-year

About flat year-over-year

33.5%

Adjusted operating margin

About 7.4% to 7.6%

About 7.3% to 7.5%

7.3%

Adjusted interest, net

Approximately $20 million

Approximately $25 million

$17 million

Adjusted effective tax rate

Approximately 25% to 26%

Approximately 25%

27.9%

Diluted weighted average share count

Approximately 367 million

Approximately 375 million

384 million

Adjusted diluted earnings per share

Approximately $2.35 to $2.45

Approximately $2.30 to $2.40

$2.13

Capital expenditures

Approximately $650 million

Approximately $650 million

$470 million

Net store closures 2

About flat

About flat

32

Third Quarter Fiscal 2026

Third Quarter Fiscal 2026 Outlook

Q3 2025 Results

Net sales

Up 1.5% to 2.5% year-over-year

$3.9 billion

Gross margin

Up about 25 to 75 basis points

42.4%

Operating expense (% of net sales)

Slight leverage

33.9%

Webcast and Conference Call Information

Shirley Martin, Senior Director of Investor Relations at Gap Inc., will host a conference call to review the Company's second quarter fiscal 2026 results beginning at approximately 2:00 p.m. Pacific Time today. Ms. Martin will be joined by President and Chief Executive Officer, Richard Dickson and Chief Financial Officer, Katrina O'Connell.

A live webcast of the conference call and accompanying materials will be available online at investors.gapinc.com. A replay of the webcast will be available at the same location.

1 There were no adjusted metrics during fiscal 2025; therefore, reported amounts for gross margin, operating expense as a percentage of net sales, operating margin, interest, net, effective tax rate, and diluted earnings per share are included for comparative purposes.

2 Refers to Company-operated stores.

Market Share Information

References to market share in this press release and related conference call and accompanying materials are for the US market, according to Circana data for the 12 month period ending July 2026, unless stated otherwise. Market share data is subject to limitations on the availability of up-to-date information. In particular, market share data may not be available for all retail channels in a category. The Company believes that the Circana data is reliable, but it has not verified the accuracy or completeness of the data or any assumptions underlying the data. In addition, market share information reported by the Company may be different from market share information reported by other companies due to differences in category definitions, the use of data from different vendors, internal estimates and other factors.

Non-GAAP Disclosure