Gap Reports Margin Growth and Cash Surge

Gap(NYSE: GPS) reported second quarter fiscal 2025 (period ending Jan. 31, 2026) results on July 29, 2025, highlighting comparable sales growth of 1% year over year and operating margin of 7.8%. Old Navy, Gap, and Banana Republic all posted positive comparable sales, but Athleta experienced a double-digit sales decline, with notable strength in inventory discipline and cost management offsetting new tariff headwinds. Gap updated its fiscal 2025 operating margin guidance to 6.7%-7%, explicitly absorbing $150 million to $175 million in incremental annualized tariff costs in fiscal 2025 while maintaining its 1%-2% net sales growth expectations for fiscal 2025.

Operating margin grows despite tariff and Athleta setbacks

Operating margin came in at 7.8%, down 10 basis points compared to last year despite a 140 basis point gross margin contraction, attributed mostly to credit card benefit lapping and inventory actions at Athleta. Cash, cash equivalents, and short-term investments climbed 13% year over year to $2.4 billion, reflecting the highest cash levels in 15 years as of fiscal 2024 (period ending Jan. 31, 2025), and supporting $144 million in shareholder returns during the period.

"We delivered operating margin of 7.8% EPS of 57¢, up 6% versus last year, and ended the quarter with strong cash balances of approximately $2.4 billion allowing us to make targeted investments in capabilities. Infrastructure, and our brands to drive shareholder value creation over time."
— Richard Dixon, Chief Executive Officer

This margin resilience and capital build bolster Gap's ability to absorb external shocks, fund growth initiatives, and drive long-term shareholder return irrespective of transitory macro or segment pressures.

Gap brand momentum accelerates with digital engagement and price discipline

Gap brand delivered its seventh straight quarter of positive comparable sales, with comps up 4% year over year and net sales up 1% year over year; this was accompanied by broad-based strength in new product launches, average unit retail (AUR) growth, and viral social media traction, notably 20 million views in three days for its latest campaign ("Better in Denim") for Gap. Key collaborations contributed, but growth in AUR persisted even excluding the impact from these limited-run partnerships, indicating underlying pricing power and customer engagement through core product relevance.

"To be very direct, the AUR is up, and it would be up without the collaborations. What's really driving Gap's momentum is the execution of our playbook. We're continuing to deliver strong and consistent results, building momentum that gets bigger and better every time."
— Richard Dixon, Chief Executive Officer

The ability to drive higher average pricing and digital engagement independent of collaborations demonstrates the brand's progression from discounting to sustained premium positioning and strengthens the investment case for ongoing comp momentum, as evidenced by Gap brand's seventh consecutive quarter of positive comparable sales and a 4% comp.

Tariff mitigation strategies position Gap for margin improvement by 2026

New U.S. trade policy has created $150 million to $175 million in incremental annualized tariff impacts (about 100-110 basis points to margin) for fiscal 2025, with teams quickly deploying mitigation levers, including repricing, assortment, and sourcing changes, to prevent further EBIT degradation in fiscal 2026. Management confirmed that, excluding tariffs, underlying gross and operating margins would have expanded year over year in fiscal 2025, and expects to fully offset tariffs over time, unlocking future operating margin improvement opportunities.

"we don't currently expect that the annualization of tariffs in 2026 will cause further operating income to declines year over year. And we expect to mitigate the full impact of tariffs over time which we believe represents actual opportunity for operating margin improvement over the longer term."
— Katrina O'Connell, Chief Financial Officer

Swift and diversified mitigation efforts limit downside risk from external cost shocks, supporting a favorable long-term margin and profit growth trajectory even in a higher tariff environment, as discussed in the context of fiscal 2025.

Looking Ahead

Management reiterated its full-year net sales growth guidance of 1%-2% for fiscal 2025 and expects operating margin in the 6.7%-7% range for fiscal 2025, incorporating a 100-110 basis point net tariff impact. Third quarter fiscal 2025 guidance calls for net sales up 1.5%-2.5% year over year, gross margin deleverage of 150-170 basis points (driven primarily by a 200 basis point tariff impact) expected for Q3 fiscal 2025, and near-term SG&A deleverage is expected in Q3 fiscal 2025 due to the phasing of technology investments. No additional specific longer-term quantitative targets were provided beyond the explicit intention to mitigate the full impact of tariffs and improve operating margin over time.

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This article was created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.