Q2 FY2026
Filed Aug 27, 2026Gap 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.
Adjusted profitability improved despite lower sales and comparable sales, led by Gap brand momentum and tariff mitigation, but Old Navy and Athleta declined and the full-year sales outlook was narrowed.
Key metrics
as reported| Metric | Value | q/q | y/y |
|---|---|---|---|
| Net salesGAAP | $3,651 million | – | down 2% |
| Comparable salesother | down 1% | – | down 2 percentage points |
| Store salesother | decreased 3% | – | decreased 3% |
| Online salesother | decreased 1% | – | decreased 1% |
| Online sales as a percentage of total net salesother | 35% | – | – |
| Cost of goods sold and occupancy expensesGAAP | $1,722 million | – | – |
| Gross profitGAAP | $1,929 million | – | – |
| Gross marginGAAP | 52.8% | – | increased 1,160 basis points |
| Adjusted gross marginnon-GAAP | 41.4% | – | increased 20 basis points |
| Operating expensesGAAP | $1,253 million | – | – |
| Operating expenses as a percentage of net salesGAAP | 34.3% | – | – |
| Operating incomeGAAP | $676 million | – | – |
| Operating marginGAAP | 18.5% | – | – |
| Adjusted operating incomenon-GAAP | $259 million | – | – |
| Adjusted operating marginnon-GAAP | 7.1% | – | – |
| Interest, netGAAP | $(4) million | – | – |
| Income before income taxesGAAP | $680 million | – | – |
| Income tax expenseGAAP | $179 million | – | – |
| Effective tax rateGAAP | 26.3% | – | – |
| Adjusted effective tax ratenon-GAAP | 26.4% | – | – |
| Net incomeGAAP | $501 million | – | – |
| Adjusted net incomenon-GAAP | $190 million | – | – |
| Diluted earnings per shareGAAP | $1.38 | – | – |
| Adjusted diluted earnings per sharenon-GAAP | $0.52 | – | – |
| Basic earnings per shareGAAP | $1.41 | – | – |
| Diluted weighted-average number of sharesGAAP | 362 million | – | – |
| Basic weighted-average number of sharesGAAP | 355 million | – | – |
| Merchandise marginGAAP | increased 1,220 basis points | – | increased 1,220 basis points |
| Adjusted merchandise marginnon-GAAP | increased 80 basis points | – | increased 80 basis points |
| Rent, occupancy, and depreciation as a percent of salesother | deleveraged 60 basis points | – | deleveraged 60 basis points |
Segments
| Segment | Revenue | q/q | y/y |
|---|---|---|---|
| Old NavyComparable sales were down 4% reflecting expected pressure in the women's seasonal assortment, in addition to an unanticipated slowdown in traffic. | $2,061 million | – | down 4% |
| GapComparable sales were up 10%, with big ideas and culturally relevant storytelling driving destination categories including denim, fleece, and kids and baby. | $844 million | – | up 9% |
| Banana RepublicComparable sales were up 3%; performance was balanced across men's and women's, supported by assortment progress, more distinctive marketing and brand storytelling. | $478 million | – | up 1% |
| AthletaComparable sales were down 12%; the brand remains focused on disciplined execution to rebuild the brand profitably. | $264 million | – | down 12% |
| OtherPrimarily consists of net sales from revenue-generating strategic initiatives. | $4 million | – | – |
Full Year Fiscal 2026 and Third Quarter Fiscal 2026 outlook
- RevenueFull Year Fiscal 2026 net sales: Up 1% to 1.5% year-over-year; Third Quarter Fiscal 2026 net sales: Up 1.5% to 2.5% year-over-year.
- Gross marginFull Year Fiscal 2026 adjusted gross margin: Up slightly year-over-year; Third Quarter Fiscal 2026 gross margin: Up about 25 to 75 basis points.
- Operating expensesFull Year Fiscal 2026 adjusted operating expense (% of net sales): About flat year-over-year; Third Quarter Fiscal 2026 operating expense (% of net sales): Slight leverage.
- Tax rateFull Year Fiscal 2026 adjusted effective tax rate: Approximately 25% to 26%.
- NoteFull Year Fiscal 2026 Old Navy comparable sales: flat to down 1%.
- NoteFull Year Fiscal 2026 Gap comparable sales: grow in the high-single to low double-digit range.
- NoteFull Year Fiscal 2026 adjusted operating margin: About 7.4% to 7.6%.
- NoteFull Year Fiscal 2026 adjusted interest, net: Approximately $20 million.
- NoteFull Year Fiscal 2026 diluted weighted average share count: Approximately 367 million.
- NoteFull Year Fiscal 2026 diluted earnings per share: approximately $3.77 to $3.87.
- NoteFull Year Fiscal 2026 adjusted diluted earnings per share: Approximately $2.35 to $2.45.
- NoteFull Year Fiscal 2026 capital expenditures: Approximately $650 million.
- NoteFull Year Fiscal 2026 net store closures: About flat.
Capital returns
- Returned $262 million of cash to shareholders in the form of share repurchases and dividends during the second quarter of fiscal 2026.
- Completed the previously announced $200 million accelerated share repurchase program, with aggregate repurchases of 8.3 million shares under the program.
- Repurchased 9.3 million shares in the open market for $200 million during the second quarter.
- 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 Board of Directors approved a third quarter fiscal 2026 dividend of $0.175 per share.
- Year-to-date shareholder returns were $726 million, inclusive of $125 million in dividends and $601 million of share repurchases.
- The Company has $399 million remaining under its existing share repurchase authorization.
What drove it
- Gap comparable sales increased 10%, supported by destination-category strength in denim, fleece, and kids and baby.
- Adjusted merchandise margin increased 80 basis points, including tariff mitigation strategies and underlying expansion from Gap brand strength.
- Average unit retail increased across all brands.
- The Company recorded a $417 million adjustment to cost of goods sold related to the net IEEPA tariff recovery.
- The Company updated tariff-rate assumptions after the Section 301 announcement, which is expected to provide approximately $15 million of net tariff relief to full-year gross profit and operating income.
- The tariff-rate update is expected to provide approximately 10 basis points of benefit to full-year gross margin and operating margin, concentrated in the fourth quarter based on the timing of receipts.
Concerns
- Net sales were down 2% and comparable sales were down 1%.
- Old Navy net sales and comparable sales were each down 4%, reflecting pressure in the women's seasonal assortment and an unanticipated slowdown in traffic.
- Athleta net sales and comparable sales were each down 12%.
- Higher promotional activity at Old Navy partially offset underlying merchandise-margin expansion.
- Rent, occupancy, and depreciation as a percent of sales deleveraged 60 basis points.
- The full-year net sales outlook was updated to up 1% to 1.5% year-over-year from up 1% to 2% year-over-year, and Old Navy comparable-sales expectations were reduced to flat to down 1% from flat to up 1%.
- The outlook recognizes potential uncertainties around energy prices and U.S. tariffs.
What to watch
- Old Navy's targeted actions and whether they improve traffic and women's seasonal-assortment performance.
- Whether Gap sustains comparable-sales growth in the high-single to low double-digit range expected for fiscal 2026.
- Athleta's progress in rebuilding the brand profitably.
- Third quarter net sales growth of up 1.5% to 2.5% year-over-year and gross-margin expansion of about 25 to 75 basis points.
- The fourth-quarter concentration of expected tariff relief based on the timing of receipts.
- Execution of the transition to Michael Francis as Old Navy's next President and CEO, succeeding Haio Barbeito.
Balance sheet and cash flow
- Cash and cash equivalents were $2,103 million as of August 1, 2026, versus $2,194 million as of August 2, 2025.
- Short-term investments were $382 million as of August 1, 2026, versus $238 million as of August 2, 2025.
- Cash, cash equivalents and short-term investments were $2.5 billion, an increase of 2% from the prior year.
- Merchandise inventory was $2,297 million as of August 1, 2026, versus $2,294 million as of August 2, 2025; ending inventory was $2.3 billion and flat compared to last year.
- Long-term debt was $1,493 million as of August 1, 2026, versus $1,491 million as of August 2, 2025.
- Net cash provided by operating activities was $550 million for the 26 weeks ended August 1, 2026, versus $308 million for the 26 weeks ended August 2, 2025.
- Free cash flow was $261 million for the 26 weeks ended August 1, 2026, versus $127 million for the 26 weeks ended August 2, 2025.
- Purchases of property and equipment were $289 million for the 26 weeks ended August 1, 2026, versus $181 million for the 26 weeks ended August 2, 2025.
- Net cash used for financing activities was $777 million for the 26 weeks ended August 1, 2026, versus $292 million for the 26 weeks ended August 2, 2025.
- Net decrease in cash, cash equivalents, and restricted cash was $514 million for the 26 weeks ended August 1, 2026, versus $143 million for the 26 weeks ended August 2, 2025.
Analysis
Gap's second-quarter sales performance was uneven. Net sales were $3,651 million, down 2%, while comparable sales were down 1%. Gap Global was the clear positive, with net sales up 9% to $844 million and comparable sales up 10%, driven by denim, fleece, and kids and baby. Old Navy remained the principal drag, with $2,061 million of net sales and a 4% comparable-sales decline tied to women's seasonal-assortment pressure and an unanticipated traffic slowdown. Athleta also declined, with net sales and comparable sales each down 12%.
Reported profitability was substantially affected by the net IEEPA tariff recovery. GAAP gross margin was 52.8%, up 1,160 basis points, and GAAP operating income was $676 million, compared with $292 million in the prior-year period. Excluding the tariff recovery, adjusted gross margin was 41.4%, up 20 basis points, while adjusted operating income was $259 million and adjusted operating margin was 7.1%. The adjusted merchandise-margin increase of 80 basis points reflected tariff mitigation and Gap brand strength, partly offset by higher promotional activity at Old Navy. Rent, occupancy, and depreciation deleveraged 60 basis points.
The tariff recovery materially lifted reported earnings. The Company recorded a $417 million adjustment to cost of goods sold, while adjusted net income was $190 million and adjusted diluted earnings per share was $0.52, compared with GAAP net income of $501 million and GAAP diluted earnings per share of $1.38. The Company stated that the recovery represents approximately $512 million of IEEPA tariff refunds, partially offset by approximately $95 million for certain vendors, along with $5 million of related interest income. Remaining refunds and related interest income are expected in the third quarter.
Cash generation and capital returns remained substantial. Year-to-date operating cash flow was $550 million and free cash flow was $261 million, with $289 million of capital expenditures. The Company returned $726 million to shareholders year-to-date, including $601 million of share repurchases and $125 million of dividends. Cash, cash equivalents and short-term investments were $2.5 billion, while ending inventory was $2.3 billion and flat compared with last year.
The full-year sales outlook was narrowed to up 1% to 1.5% year-over-year, reflecting reduced Old Navy comparable-sales expectations of flat to down 1%. The Company raised its reported diluted earnings-per-share outlook to approximately $3.77 to $3.87 and increased adjusted diluted earnings-per-share guidance to approximately $2.35 to $2.45. Adjusted operating-margin guidance increased to about 7.4% to 7.6%, supported in part by approximately $15 million of expected tariff relief, with the benefit expected to be concentrated in the fourth quarter. Third-quarter guidance calls for net sales growth of up 1.5% to 2.5% year-over-year, gross-margin expansion of about 25 to 75 basis points, and slight operating-expense leverage.
Management, verbatim
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.
Richard Dickson, President and Chief Executive Officer
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.
Richard Dickson, President and Chief Executive Officer
Not in the filing
stated, not guessed- Prior-quarter comparisons for second-quarter net sales, comparable sales, segment sales, gross margin, operating income, net income, earnings per share, cash flow and other reported metrics were not provided.
- Prior-year GAAP gross margin, GAAP operating margin, GAAP operating expenses as a percentage of net sales, GAAP effective tax rate, adjusted gross margin, adjusted operating income, adjusted operating margin, adjusted net income and adjusted diluted earnings per share were not printed on their respective line items.
- A previous-release outlook that permits comparison of second-quarter actual results with prior quarterly guidance was not provided.
- Third-quarter operating income, operating margin, earnings per share, tax rate, capital expenditures, cash flow and capital-return guidance were not provided.
AlphaAI analysis generated from the company’s SEC earnings filing (Form 8-K Item 2.02, or Form 6-K for a foreign private issuer). Every figure was cross-checked against the filing text; consensus estimates, price targets and share-price reactions are not shown because they are not in the filing. AI-generated research, not investment advice.