Gap Stock Surges as Higher Profit Targets Overshadow Slowing Sales

2026-08-28 companies

San Francisco, Friday, 28 August 2026.
Gap raised its full-year earnings forecast as strict margin discipline and a $417 million tariff refund boosted profits, sending shares up 11% despite falling Old Navy sales.

Market Reaction and Profit Overview

Gap Inc. (NYSE: GPS) shares surged 11% in after-hours trading on Thursday, 27 August 2026, following the release of second-quarter financial results [1][5]. Investors responded positively to the company’s decision to raise its full-year profit outlook, despite revenue missing top-line estimates [1][6]. The retailer’s focus on margin expansion and operational discipline outweighed concerns regarding slumping demand at its Old Navy division [1][7].

Reported net profit for the quarter more than doubled to $501 million, compared to $216 million in the same period last year [3][8]. This significant increase was largely driven by a net $417 million recovery tied to tariffs imposed under the International Emergency Economic Powers Act in April 2025 [1][8]. Excluding this one-off item, adjusted earnings per share came in at $0.52, topping the consensus estimate of $0.48 [1][5].

Revenue Dynamics and Tariff Impact

Second-quarter revenue slipped 2% to $3.65 billion, falling short of the $3.69 billion expected by analysts [1][3]. The company’s adjusted gross margin rose 20 basis points to 41.4%, reflecting strict inventory management and pricing strategies [1][5]. However, the adjusted operating margin slipped to 7.1% from 7.8% a year earlier, though it remained above management expectations [1].

The growth in net income represents a substantial year-over-year increase based on the reported figures [3][8]. The percentage growth in net income can be expressed as 131.944 [3][8]. This calculation highlights the impact of the tariff recovery on the bottom line [6][8].

Brand Performance Divergence

Operating performance was driven mainly by the Gap brand, where sales rose 9% and comparable sales increased 10% [1][5]. This marked a tenth consecutive quarter of growth for the namesake brand, contrasting sharply with other divisions [5][7]. Banana Republic posted 3% comparable growth, while Athleta remained under pressure with a 12% decline [1][7].

Old Navy, which represents over half of group revenue, saw sales fall 4% during the quarter [1][5]. CEO Richard Dickson acknowledged that sales were modestly below expectations due to a disappointing seasonal women’s assortment [6][8]. The company noted an unexpected slowdown in traffic weighed on performance at the brand [6][8].

Leadership Changes and Future Guidance

In response to the challenges at Old Navy, Gap Inc. announced that Michael Francis will become the next President and CEO of Old Navy, effective 2 November 2026 [5][8]. Francis, currently Chief Customer Officer of Old Navy, will succeed Haio Barbeito, who will transition to an advisory role [5][8]. Dickson stated that Francis is uniquely equipped to lead the brand’s next chapter of growth [8].

For fiscal year 2026, the retailer raised its adjusted EPS forecast to a range of $2.35 to $2.45, up from $2.30 to $2.40 previously [1][7]. Expected sales growth was trimmed to 1% to 1.5%, reflecting a more cautious outlook for Old Navy [1][8]. Gap expects revenue growth to re-accelerate to between 1.5% and 2.5% in the third quarter [1][5].

Sources

Gap Inc. Retail Earnings