Gap Inc. (NYSE: GAP) reported fiscal Q2 2026 net sales of $3.651 billion, down 2% from $3.725 billion a year earlier, while diluted EPS rose to $1.38 from $0.57. For the quarter ended August 1, 2026, reported profit was heavily affected by an IEEPA tariff-recovery adjustment; excluding that item, adjusted diluted EPS was $0.52 and adjusted operating margin was 7.1%. Gap brand growth partly offset declines at Old Navy and Athleta, creating a wide performance gap across the portfolio.
Core Earnings Results
Comparable sales declined 1%, with store sales down 3% and online sales down 1%. Online represented 35% of total net sales.
GAAP profitability increased sharply because Gap recorded a $417 million reduction to cost of goods sold related to the net tariff recovery. Excluding that benefit, gross margin improved only modestly, while adjusted operating income and EPS were below the prior-year reported amounts.
| Metric | Q2 Fiscal 2026 | Q2 Fiscal 2025 | YoY Change |
|---|---|---|---|
| Net sales | $3,651 million | $3,725 million | Down 2% |
| GAAP gross margin | 52.8% | 41.2% | Up 1,160 bps |
| Adjusted gross margin | 41.4% | 41.2% reported | Up 20 bps |
| GAAP operating income and margin | $676 million / 18.5% | $292 million / 7.8% | Income up about 132%; margin up about 1,070 bps |
| Adjusted operating income and margin | $259 million / 7.1% | $292 million / 7.8% reported | Income down about 11%; margin down about 70 bps |
| GAAP net income | $501 million | $216 million | Up about 132% |
| GAAP diluted EPS | $1.38 | $0.57 | Up about 142% |
| Adjusted net income and diluted EPS | $190 million / $0.52 | $216 million / $0.57 reported | Down about 12% / 9% |
The adjusted figures exclude the net IEEPA tariff recovery and related interest income. Prior-year reported results are shown as the comparator where Gap did not report an equivalent adjustment.
Business and Brand Performance
Old Navy and Athleta accounted for the overall sales decline, while the Gap brand delivered another quarter of double-digit comparable-sales growth. Banana Republic posted modest growth across both men’s and women’s products.
| Brand | Q2 Fiscal 2026 Net Sales | YoY Net Sales Change | Comparable Sales |
|---|---|---|---|
| Old Navy | $2,061 million | Down 4% | Down 4% |
| Gap | $844 million | Up 9% | Up 10% |
| Banana Republic | $478 million | Up 1% | Up 3% |
| Athleta | $264 million | Down 12% | Down 12% |
Old Navy’s decline reflected pressure in women’s seasonal assortments and an unanticipated slowdown in customer traffic. Higher promotional activity at the brand also partially offset merchandise-margin gains elsewhere.
Gap brand growth was driven by denim, fleece, and kids and baby categories, supported by the company’s focus on larger product ideas and culturally relevant marketing. Athleta remained the weakest brand, with both net sales and comparable sales falling 12% as the company continued efforts to rebuild the business profitably.
Tariff Recovery Lifted GAAP Profit While Underlying Margin Stayed Near Last Year
The $417 million cost-of-goods-sold adjustment increased reported gross margin by 1,140 basis points and accounted for nearly all of the 1,160-basis-point year-over-year GAAP expansion. It also increased net income by $311 million and diluted EPS by $0.86.
On an adjusted basis, gross margin was 41.4%, only 20 basis points higher year over year. Merchandise margin excluding the recovery improved 80 basis points, helped by tariff mitigation, higher average unit retail across all brands, and strength at Gap. These gains were partly offset by Old Navy promotions, while rent, occupancy, and depreciation deleveraged by 60 basis points.
Operating expenses increased to $1.253 billion from $1.244 billion even as sales declined. That pushed operating expenses to 34.3% of sales from approximately 33.4%, contributing to the decrease in adjusted operating margin to 7.1%.
Cash Flow and Balance Sheet
Gap ended the quarter with $2.5 billion of cash, cash equivalents, and short-term investments, up 2% from a year earlier. Inventory was essentially flat at $2.297 billion, compared with $2.294 billion in the prior-year quarter.
For the first 26 weeks of fiscal 2026, operating cash flow was $550 million, up from $308 million, and free cash flow was $261 million, up from $127 million. The current-year operating cash flow figure includes the first-quarter effects of a $313 million pretax legal settlement gain and a concurrent $50 million charitable contribution. Capital expenditures totaled $289 million year to date.
Gap returned $262 million through repurchases and dividends during the second quarter and $726 million year to date. Year-to-date shareholder returns exceeded free cash flow, while cash, cash equivalents, and restricted cash decreased by $514 million during the first 26 weeks. The company had $399 million remaining under its existing repurchase authorization.
Earnings Guidance
Gap narrowed its fiscal 2026 net-sales growth range by lowering the upper end, reflecting weaker expectations for Old Navy. At the same time, it raised adjusted operating-margin and adjusted EPS guidance, supported in part by a lower expected share count and reduced net interest expense.
| Metric | Latest Fiscal 2026 Guidance | Previous Guidance | Change |
|---|---|---|---|
| Net sales growth | Up 1% to 1.5% | Up 1% to 2% | Upper end reduced by 0.5 percentage points |
| Old Navy comparable sales | Flat to down 1% | Flat to up 1% | Reduced |
| Gap comparable sales | High-single to low-double-digit growth | High-single-digit growth | Increased |
| Adjusted gross margin | Up slightly | Flat to up slightly | Low end improved |
| Adjusted operating margin | 7.4% to 7.6% | 7.3% to 7.5% | Up 10 bps at both ends |
| Adjusted diluted EPS | $2.35 to $2.45 | $2.30 to $2.40 | Up $0.05 at both ends |
| Adjusted net interest | Approximately $20 million | Approximately $25 million | $5 million lower |
| Diluted weighted-average shares | Approximately 367 million | Approximately 375 million | 8 million lower |
Reported full-year diluted EPS is expected to be $3.77 to $3.87. The adjusted EPS outlook excludes the legal settlement, charitable contribution, and net tariff-recovery effects.
Gap also reduced its assumed incremental tariff rate for July 24 through the end of August to roughly 10% from the previously assumed high-teens rate. The change is expected to provide approximately $15 million of full-year gross-profit and operating-income relief, concentrated in the fourth quarter.
Third-Quarter Outlook
For fiscal Q3 2026, Gap expects sales growth and additional gross-margin expansion, along with slight operating-expense leverage.
| Metric | Q3 Fiscal 2026 Outlook | Q3 Fiscal 2025 Comparison |
|---|---|---|
| Net sales | Up 1.5% to 2.5% | $3.9 billion |
| Gross margin | Up about 25 to 75 bps | 42.4% |
| Operating expenses as a percentage of sales | Slight leverage | 33.9% |
Risks Investors Should Monitor
- Old Navy execution: The company’s largest brand reported a 4% sales decline due to women’s seasonal assortments and weaker traffic. Continued promotional activity could pressure both consolidated sales and merchandise margin.
- Athleta’s extended contraction: Athleta sales and comparable sales both fell 12%, worsening from a 9% comparable-sales decline in the prior-year quarter. The timing and financial impact of its turnaround remain important variables.
- Underlying expense pressure: Adjusted gross margin improved slightly, but operating expenses rose despite lower revenue, reducing adjusted operating margin. Restoring operating leverage depends on stronger sales or tighter expense control.
- Tariff uncertainty: The quarter’s GAAP profit included a large, nonrecurring recovery, while future tariff rates remain subject to policy changes. The company also cited broader uncertainty around U.S. tariffs and energy prices.
- Capital returns relative to cash generation: Year-to-date dividends and repurchases exceeded free cash flow, contributing to the decline in cash during the first half. The sustainability of that pace depends on future operating cash generation.
Summary
Gap’s fiscal Q2 2026 results combined lower sales with sharply higher GAAP profit, but the profit increase was primarily driven by the tariff-recovery adjustment. Underlying gross margin was relatively stable, while expense deleverage reduced adjusted operating profitability. Gap brand remained the portfolio’s main growth engine, but Old Navy and Athleta continued to weigh on consolidated performance. The key next-quarter indicators are whether Old Navy traffic and assortments improve, whether Athleta’s contraction moderates, and whether the company can deliver its higher adjusted margin and EPS outlook despite the narrower sales-growth range.
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