Gap (GAP) Q4 2025 Earnings Call Transcript

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DATE

Thursday, March 5, 2026 at 5 p.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Richard Dickson
• Chief Financial Officer — Katrina O'Connell

TAKEAWAYS

• Comparable Sales -- Up 3% for the quarter, marking the eighth consecutive quarter of positive comps, led by all major brands except Athleta.
• Net Sales -- Increased 2% year over year to $4.2 billion in the quarter, with Old Navy up 3%, Gap up 8%, Banana Republic up 1%, and Athleta down 11%.
• Gross Margin -- Ended the quarter at 38.1%, down 80 basis points due to a 200 basis point headwind from tariffs offsetting lower discounting and improved average unit retails.
• Operating Margin -- Reported at 5.4% for the quarter, declining 80 basis points primarily from tariff impacts.
• Earnings Per Share -- $0.45 for the quarter versus $0.54 in the prior year, reflecting margin headwinds and SG&A timing.
• SG&A Expenses -- Rose to $1.4 billion for the quarter, or 32.7% of net sales, deleveraging 10 basis points, primarily due to incentive compensation timing and strategic investments.
• Full-Year Net Sales -- $15.4 billion, up 2%, at the high end of provided guidance.
• Full-Year Gross Margin -- 40.8%, declining 50 basis points, with tariffs negatively impacting by 80 basis points.
• Operating Income -- $1.1 billion for the year; operating margin at 7.3% with 10 basis point decline versus last year attributed entirely to tariff impacts.
• Cash Balance -- Ended the year with $3.0 billion in cash, cash equivalents, and short-term investments, the highest in nearly 20 years.
• Free Cash Flow -- $823 million for the year, with $1.3 billion in net operating cash and $470 million in capital expenditures.
• Shareholder Returns -- $247 million in dividends and $155 million spent to repurchase 7 million shares, meeting dilution offset goals for the year.
• New Capital Actions -- The Board approved a $1.0 billion share repurchase authorization and increased the first-quarter dividend by 6% to $0.175 per share.
• Brand Performance -- Old Navy and Banana Republic delivered second consecutive year of positive comps, Gap delivered third consecutive year of comp growth, while Athleta comps declined 9% for the full year.
• Tariff Impacts -- Tariffs reduced full-year gross and operating margins by roughly 120 basis points and impacted the quarter by 200 basis points, but mitigation strategies managed these pressures.
• 2026 Outlook -- Net sales growth forecast at 2%-3%, adjusted operating margin expected at 7.3%-7.5%, and adjusted EPS guidance of $2.20 to $2.35, reflecting 4%-10% growth; reported EPS of $2.71-$2.86 includes a legal settlement benefit net of a $50 million charitable donation.
• Store Footprint -- Approximately 35 net closures occurred in 2025, primarily at Banana Republic; net closures expected to be flat in 2026 as store fleet optimization concludes and focus shifts to accelerating new formats.
• Strategic Initiatives -- Announced expansions into beauty and accessories, with significant TAM cited for accessories and pilot beauty programs validated as basket-building and engagement-driving in 150 Old Navy stores.
• Loyalty Program Relaunch -- Company launched “Encore,” targeting nearly 40 million members with integrated fashion, entertainment, and access benefits aimed at deeper customer engagement.
• Technology Investments -- Increased capital expenditure planned to $650 million in 2026, with focus on stores, technology, AI, supply chain, and RFID initiatives.

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RISKS

• Athleta Performance -- Athleta’s net sales decreased 11% and comparable sales fell 10% in the quarter, with management characterizing trends as “disappointing” and projecting further mid- to high-single-digit declines in the first half of 2026.
• Tariff Headwinds -- “tariffs influenced our fiscal year's gross and operating margins by approximately 120 basis points and affected our fourth-quarter gross and operating margins by approximately 200 basis points.”
• Gross Margin Pressures -- Q1 2026 guidance calls for 150–200 basis point decline in gross margins from last year’s 41.8%, driven largely by tariffs, with improvement only expected as mitigation strategies build “sequentially throughout the year.”
• Legal/Regulatory Uncertainty -- CFO O’Connell stated, “our guidance today reflects tariff rates under the IEPA regime and therefore does not contemplate the recently announced Supreme Court ruling and subsequent Section 122 announcement. These recent events were not contemplated in our original plans for fiscal year 2026. If the Section 122 tariffs stay in place for the year or expire in July, we do believe there could be an incremental benefit to our current plans.”

SUMMARY

Management attributed sustained comp sales gains and top-line growth to disciplined execution of their transformation playbook and stronger brand positioning for Old Navy, Gap, and Banana Republic. Store fleet optimization efforts have concluded, with future investments shifting to new format rollouts and technology modernization, including an enhanced AI-driven supply chain and RFID. Capital allocation priorities now target both business reinvestment and stepped-up shareholder returns, demonstrated by a larger repurchase authorization and increased dividend. Market-moving initiatives include the Encore loyalty program redesign, further penetration of the beauty and accessories categories, and the appointment of a Chief Entertainment Officer to scale fashiontainment and licensing businesses.

• Management stated, “Gap's momentum accelerated meaningfully in the fourth quarter, delivering comp sales up 7% on top of last year's 7% comp growth, marking its ninth consecutive quarter of positive comps.”
• Old Navy's performance was underscored by brand leadership in denim, active, and kids and baby; its beauty pilot was described as “basket-building” and consumer engagement–driving in 150 stores.
• Banana Republic achieved its third consecutive quarter of positive comps, credited to sharper merchandising and storytelling with integration of men’s and women’s collections.
• The Board approved a $50 million charitable donation funded by a legal settlement, recognized in reported EPS and specifically excluded from adjusted EPS guidance.
• Store closures were “primarily” attributed to underperformance at Banana Republic, with expansion to new store formats and experiential concepts cited among 2026 spend drivers.
• Guidance does not incorporate potential financial impact from the Section 122 tariff regime, noting any benefit could accrue to Q3 or Q4 depending on regulatory developments.

INDUSTRY GLOSSARY

• TAM (Total Addressable Market): The total revenue opportunity available for a product or category, referenced in context of accessories and beauty expansions.
• ROD: Rent, occupancy, and depreciation expense as referenced in gross margin discussion.
• AUR (Average Unit Retail): The average selling price per unit of merchandise sold, a KPI for pricing and discounting strategies.
• SG&A (Selling, General, and Administrative Expenses): Non-production costs related to selling and administration, cited as a percentage of sales and for leverage/deleverage analysis.
• Fashiontainment: The company’s coined term for the intersection of fashion and entertainment platforms, used as a strategic lever for consumer engagement and brand relevance.

Full Conference Call Transcript

Whitney Notaro: Good afternoon, everyone. Welcome to The Gap, Inc. fourth quarter fiscal 2025 earnings conference call. Before we begin, I would like to remind you that the information made available on this conference call contains forward-looking statements that are subject to risks that could cause our actual results to be materially different.

For information on factors that could cause our actual results to differ materially from any forward-looking statements, please refer to the cautionary statements contained in our latest earnings release, the risk factors described in the company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2025, Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission on May 30, 2025, August 29, 2025, and November 26, 2025, and other filings with the Securities and Exchange Commission, all of which are available on gapinc.com. These forward-looking statements are based on information as of today, March 5, 2026, and we assume no obligation to publicly update or revise our forward-looking statements.

Our latest earnings release and the accompanying materials available on gapinc.com also include descriptions and, where available, reconciliations of financial measures not consistent with generally accepted accounting principles. All market share data referenced today will be from Circana's U.S. Apparel Consumer Service for the 12 months ending January 2026, unless otherwise stated. Joining me on the call today are Chief Executive Officer, Richard Dickson, and Chief Financial Officer, Katrina O'Connell. I will now turn the call over to Richard.

Richard Dickson: Thanks, Whitney, and good afternoon, everyone. I am pleased to report that we delivered another successful fourth quarter, in line with our expectations and marking another year of meaningful progress for The Gap, Inc. In the quarter, we achieved comparable sales of 3%, our eighth consecutive quarter of positive comps, while once again winning across all income cohorts. We continued to do what we said we were going to do, underscoring the growing resilience, durability, and potential of our portfolio. Reflecting on the full year, 2025 continued to demonstrate our ability to perform while we transform, even in a highly dynamic environment, as we execute our strategic priorities and deliver consistent performance while fixing the fundamentals.

Through the disciplined execution of our brand reinvigoration playbook, we are building a clear track record of reliable growth, proving our three largest brands can deliver quarter after quarter. The Gap, Inc. achieved its second consecutive year of top-line growth. Full-year net sales grew 2%, at the high end of our outlook, fueled by comparable sales of 3%, building on last year's 1% net sales growth and 3% comp. Our playbook continues to fuel our portfolio with Gap delivering its third consecutive year of positive comp sales, and both Old Navy and Banana Republic reporting their second consecutive year of positive comp sales.

We delivered one of our highest gross margins in the last 25 years and generated $1.1 billion in full-year operating income, a clear reflection of the strength of our platform and the financial and operational rigor embedded across the organization. Disciplined execution throughout the year further strengthened our balance sheet, enabling us to end 2025 with a cash balance of $3.0 billion, our highest in nearly two decades. Based on our strong financial position and confidence in our continued progress, the Board recently approved an increase in our first-quarter dividend and a new $1.0 billion share repurchase authorization. I am proud of the resilience this team has shown and what we have achieved together.

This performance gives me confidence as we continue to move forward. That confidence is rooted in something deeper than any single quarter or year. Since 1969, when the Fishers opened a single store to bridge a generation gap, The Gap, Inc. has proven that purpose and profit can coexist, taking pride in doing what is right for our company, our customers, and our communities, and building brands that matter. It is that legacy of bridging gaps and leading with purpose that brings us to today. We have a unique opportunity with the legal settlement received to pledge a $50 million charitable donation to a combination of The Gap Foundation and our donor-advised fund.

This marks a true legacy moment, honoring a heritage rooted in shared humanity and ensuring that our commitment to create a better world endures for generations to come. On today's call, I will discuss our fourth quarter performance by brand and share how we are thinking about 2026 in the context of our strategy. Then, Katrina will walk you through our detailed financial results and outlook, after which we will open the call for questions.

Starting with Old Navy, as we execute on our reinvigoration playbook, Old Navy is becoming a proven growth engine with consistency and scale that drives meaningful value. Fourth-quarter comp sales grew 3%, building on last year's 3% comp growth and reflecting the brand's fifth consecutive quarter of positive comps. Old Navy ranks as a top-three brand in nine of the 10 largest apparel categories and gained share in all five of the largest categories on a rolling 12-month basis. Old Navy continues to win at the intersection of great product, quality, and price.

The brand's focused pursuit of leadership in active, denim, and kids and baby drove strong performance across each of these categories, as the brand continued to innovate and excite our customers. Both active and denim continued to grow share, and the strong execution of our Disney partnership has positioned Old Navy as Disney's number one apparel brand direct-to-consumer partner in the United States. The brand has also continued to evolve its media mix model to meet consumers where they are, growing its presence on social media platforms and significantly increasing creator volume with over 15,000 creators in the fourth quarter, almost three times the number of creators last year.

Looking ahead, Old Navy is well positioned and we are confident in the brand's ability to deliver consistently, largely in line with its performance over the past two years.

Now let us turn to Gap. Gap's momentum accelerated meaningfully in the fourth quarter, delivering comp sales up 7% on top of last year's 7% comp growth, marking its ninth consecutive quarter of positive comps. Returning to its powerful heritage, the brand is once again bridging the generation gap, continuing to attract Gen Z while growing its core customer, and that multigenerational appeal is showing up in the results. Gap, at its best, is a true original, a pop culture brand that celebrates individuality, united through music, genres, and collaborations that bridge generations and cultures.

We are leaning into that heritage with intention—from red carpet moments, most recently dressing Leon Thomas for the Grammys and Claire Danes for the Golden Globes, to co-hosting a star-studded Super Bowl event in San Francisco, to spotlighting emerging artists from Tyla and Troye Sivan to Cat's Eye and Sienna Spiro. Gap is showing up in culture in ways that are authentic and relevant. In the fourth quarter, the team executed our playbook with fluency, which was demonstrated through their Give Your Gift holiday campaign and culturally relevant collaborations, supported by a highly evolved media mix. We saw particular strength in key categories like fleece, including logo, denim, and sleepwear. As brand relevance has increased, we are also proving elasticity.

This was our second quarter of meaningfully pulling back discounting, driven by on-trend product and strong brand heat. With a focus on elevating the customer shopping experience, new store models continue to outperform the fleet, giving us confidence in the opportunity to accelerate these formats in 2026. I am proud to say that Gap, our namesake brand of 56 years, is firmly back in growth mode.

Banana Republic delivered a 4% comp, building on a 4% comp last year with sharper merchandising and execution. Banana Republic has returned to its roots as a storytelling brand expressed through the lens of the modern explorer. You could see that story coming to life more cohesively and comprehensively through our assortments, merchandising, and how we show up in culture, and consumers have taken notice. There is greater synergy between men's and women's with head-to-toe wardrobing guided by a clear style guide and design language that is informing design, presentation, and storytelling. Leather, suede, cashmere, and texture, all synonymous with Banana Republic's design language, are reinforcing the brand's distinctive point of view.

This is a great example of the differentiation of our portfolio coming alive, and we look forward to getting even sharper with more precision, more narrative-led merchandising, and a dialed-up fashion quotient that underscores Banana Republic's unique brand DNA.

Shifting to Athleta. While Athleta remains a work in progress, we took decisive action in 2025, appointing Maggie Gauger to lead its reinvigoration. The active category remains strategically important and resilient. Even amid disruption, customers continue to make fashion choices that are active-oriented. Within that landscape, Athleta holds a meaningful position as the number-five women's active brand, with distinction as a women's-only brand rooted in quality, performance, and design intent exclusively for her. And while Athleta sales trend has been disappointing, we have accumulated critical learnings and are acting on them with intention. We are re-architecting the assortment, building key items into enduring franchises, and reorganizing the brand around consumer insights.

Maggie is going deep with the team, even meeting with Athleta's founder, to reconnect the brand to its original purpose and establish clarity and alignment around the brand's identity. With the strength of our portfolio and our proven playbook, 2026 will be about positioning the brand for sustainable growth in the years ahead. Progress will take time, but I am confident we are attracting the right talent to rebuild Athleta.

In 2025, the power of our portfolio became clear as our playbook successfully delivered consistent growth across our three largest brands. This was reflected in the metrics that matter, the strength of our product, and in the cultural narratives that are resonating with consumers. Moving at the speed of culture takes focus and discipline, and we are working together with clarity and conviction to continue to advance our strategy. As we have shared, we have been very purposeful in the sequential order of our transformation. Over the last two years, we have focused on fixing the fundamentals, maintaining financial and operational rigor, reinvigorating our brands, strengthening our platform, and energizing our culture.

The meaningful progress we have made across these strategic priorities has enabled us to consistently perform while we transform, strengthening our financial model and driving shareholder value.

As we move into the next phase of our transformation—building momentum—our primary focus will be growing our core apparel business through continuous improvement, driven by disciplined execution with better product, marketing, and storytelling. In parallel, we will be building on the strength of our apparel business by thoughtfully seeding growth accelerators and new capabilities. We are beginning with expansions into adjacent lifestyle categories such as beauty and accessories, two categories that are underdeveloped in our portfolio but are meaningful to our consumers and sizable in the industry. We will also continue advancing our fashiontainment platform and technology capabilities, all with the intent to build scale, relevance, and revenue over time.

Let me take a moment to share more about each of these. Starting with beauty. As discussed in the past, beauty is one of the fastest-growing, most resilient retail categories in the U.S., and our customer insights reinforce strong engagement. Our research suggests that for other fashion apparel businesses that have entered the beauty space, beauty makes up anywhere from 5% to 20% of their business. We believe this is a good indicator of the category's potential in our business over the longer term. In 2025, we introduced the consumer to our expanded beauty assortment at Old Navy and are making refinements based on our customer feedback.

In 2026, we will be deepening this engagement with consumers and look forward to reintroducing a fragrance assortment at Gap this summer.

Turning to accessories. Our accessory category performed well in 2025, reinforcing our confidence in this expansion. According to Euromonitor, this category has a $15 billion total addressable market, and today The Gap, Inc. represents just 1% of the market share. Consumers are looking for us to be more pronounced in accessories, and we see an exciting opportunity to become a destination for wardrobing. We look forward to launching an expanded accessory line for holiday. We believe the beauty and accessory categories have the added benefit of serving as margin and traffic drivers that strengthen our brands, deepen customer connection, and build lasting loyalty. We have appointed proven industry leaders to lead each of these areas with focus and discipline.

Our fashiontainment platform is another area we will be focusing on in 2026. Today's customers are not just buying apparel; they are buying brands that tell stories and drive cultural conversations. As we continue to build our brands, we see entertainment as a powerful growth lever. Last month, Pam Kaufman joined The Gap, Inc. as Chief Entertainment Officer, adding focused leadership, expertise, and relationships across entertainment and licensing. The fashiontainment platform we are building is about amplifying and scaling what is already working, expanding licensing, strengthening strategic partnerships, and aligning our assortments more intentionally with the entertainment calendar.

One capability we believe can be better monetized is our loyalty program. The Gap, Inc. has one of the largest programs in U.S. apparel retail with nearly 40 million active members. Last week, we launched Encore, our newly reimagined loyalty program, setting a new standard for loyalty in the apparel space. Encore brings our fashiontainment platform to life by turning purchases into experiences that give members access to fashion, entertainment, and the moments they care about across our portfolio of brands. It represents a shift from a traditional points-based loyalty program to a broader engagement platform. By bringing fashion, entertainment, and access together, we are building momentum, deepening relationships, and creating long-term value across our portfolio.

Technology is another platform capability where we see opportunity, especially with AI. Our AI strategy is focused on three areas: enable, optimize, and reinvent. Enable is about enterprise-wide adoption, equipping our teams with AI tools that improve day-to-day productivity, streamline workflows, and build AI fluency across the organization. Optimize focuses on high-impact process improvements to drive efficiency, accuracy, and speed. Reinvent is about reimagining our customer, product, and enterprise journeys end to end. We are focusing on areas where AI can meaningfully reduce customer friction, increase predictability across product-to-market, and unlock productivity within the enterprise.

As we close the first chapter of our transformation and step into the next, we do so with a brand portfolio that is consistently growing, healthy gross margins, disciplined expense management, sustained bottom-line performance, and strong cash on hand. Looking ahead, we have a focused, energized team that believes in the future we are building. Our aspirations remain high, and we are positioned to deliver. I am excited about the opportunity ahead and confident in our ability to capture it. I will now turn the call to Katrina for a closer look at our financials.

Katrina O'Connell: Thank you, Richard, and thanks, everyone, for joining us this afternoon. Execution of our strategic priorities continues to drive results, and 2025 was a strong year of financial performance. We grew net sales 2%, gaining market share for the year as we demonstrated relevance to customers of all income levels. It is exciting to see our playbook driving the second consecutive year of top-line growth fueled by positive comp sales across our largest brands—Old Navy, Gap, and Banana Republic. The rigor we have developed is delivering reliable profit performance with another historically high gross margin of 40.8%, operating profit of $1.1 billion, and an operating margin of 7.3%.

These results reflect improved AURs as we capitalize on the growing strength of our brands combined with SG&A leverage as we continued to optimize our cost structure. Tariff impacts were significant; however, our mitigation strategies have effectively managed these pressures. Our focus on cost optimization and inventory management drove robust cash generation, ending the year with $3.0 billion in cash, cash equivalents, and short-term investments. In 2025, we generated $1.3 billion in net operating cash and $823 million in free cash flow. Our strong balance sheet allowed us to invest in high-returning projects while returning over $400 million to our shareholders through dividends and share repurchases.

I am incredibly proud of what this team has accomplished, and our performance gives us confidence in the 2026 outlook we provided today, which reflects another year of sales growth in addition to operating margin expansion.

Before discussing the detailed results for the quarter and the year, it is important to note that changes in global tariff rates in 2025 had a substantial impact on our profits. Specifically, tariffs influenced our fiscal year's gross and operating margins by approximately 120 basis points and affected our fourth-quarter gross and operating margins by approximately 200 basis points. Despite these pressures, our reported results today include these factors, showcasing our strong underlying performance thanks to the effective execution of our strategic priorities.

Now let us turn to our fourth quarter results. I am pleased with our performance, which included a solid holiday season, underscoring the increasing resonance of our brands with consumers. Fourth-quarter net sales of $4.2 billion increased 2% year over year, with comparable sales up 3%, marking our eighth consecutive quarter of positive comps. Results were in line with our plans despite disruption from expansive store closures due to extreme weather in January. By brand, Old Navy net sales were $2.3 billion, up 3% versus last year, with comparable sales up 3%, building on last year's 3% comp growth.

The brand's price-value equation is resonating with consumers, as Old Navy continues to win with strategic categories and across a wide range of income levels. Turning to Gap, net sales of $1.1 billion were up an impressive 8% versus last year, and comparable sales were up 7%. This was on top of last year's 7% comp growth, demonstrating Gap's momentum as it continues to expand its customer base across generations. Banana Republic net sales of $549 million were up 1% year over year, with comparable sales up 4%. The brand delivered its third consecutive quarter of comp growth, reflecting progress in product elevation and sharper marketing and merchandising.

Athleta net sales of $354 million decreased 11% versus last year, and comparable sales were down 10%. We remain focused on rebuilding the brand for the long term.

Let us continue to the balance of the P&L. Gross margin of 38.1% declined 80 basis points. Lower discounting resulted in another quarter of AUR growth, driven by the consumer's response to our relevant product and storytelling. Compared to last year, merchandise margins were down 90 basis points due to the net impact of tariffs. ROD leveraged 10 basis points in the quarter. SG&A increased to $1.4 billion primarily due to the quarterly timing of incentive compensation in addition to strategic investments. SG&A as a percentage of net sales was 32.7%, deleveraging 10 basis points versus last year.

Fourth-quarter operating margin of 5.4% was down 80 basis points compared to last year, primarily due to the approximately 200 basis point headwind from tariffs. Earnings per share in the quarter were $0.45 versus last year's EPS of $0.54.

Now let us turn to our full-year 2025 results. Net sales of $15.4 billion increased 2% year over year, at the high end of the guidance range we provided, with comparable sales up 3%. Our playbook is working and drove strong results across our three largest brands, with Old Navy comp sales up 3%, Gap up 6%, and Banana Republic up 3%. Comp sales for Athleta were down 9%. Gross margin of 40.8% declined 50 basis points versus last year. Merchandise margin was down 80 basis points due to the impact of tariffs, and ROD leveraged 30 basis points. SG&A was $5.2 billion. As a percentage of net sales, SG&A was 33.5%, leveraging 40 basis points versus last year.

We achieved our targeted cost efficiencies in 2025 as we rigorously managed our core expenses to fund inflation and begin our investments in growth accelerators. Fiscal 2025 operating income was $1.1 billion, resulting in an operating margin of 7.3%. The 10 basis point decline in operating margin versus last year was due to the estimated 120 basis point impact of tariffs, implying roughly 110 basis points of underlying margin expansion versus last year's 7.4%. Earnings per share for the year were $2.13, down 3% versus last year's EPS of $2.20.

Now turning to the balance sheet and cash flow. End-of-quarter inventory levels were up 7% year over year, primarily attributable to increases in tariff-related cost. Our disciplined inventory management resulted in units down year over year, and we believe we ended the year with the right inventory composition going into fiscal 2026. We expect our inventory buys in the year ahead to be in line with our rate of unit purchases positioned modestly below sales. As I highlighted earlier, we ended the year with cash, cash equivalents, and short-term investments of $3.0 billion, an increase of over $400 million compared to last year.

Full-year net cash from operating activities was $1.3 billion, and we generated free cash flow of $823 million for the year. Capital expenditures were $470 million. With regard to returning cash to shareholders during the year, we paid $247 million to shareholders in the form of dividends. Additionally, we repurchased 7 million shares for $155 million, achieving our 2025 goal of offsetting dilution.

Before I move on, I want to thank our teams for their hard work and diligence this past year. Our 2025 results reflect significant progress in our transformation journey, with the execution of our strategic priorities driving two years of impressive results. We are moving forward from a position of strength and will continue to operate with the same rigor in 2026.

Looking ahead, we are energized by our strong business results, which underpin a confident outlook for 2026. Our strong performance at Old Navy, Gap, and Banana Republic is expected to drive another year of net sales growth. At the same time, we are committed to rebuilding Athleta for sustainable long-term success. With our brands becoming increasingly relevant to consumers and our stringent inventory management practices, we anticipate continuous improvement in average unit retails, supporting robust gross margins aligned with historically high levels. Successfully navigating the challenges of a second year of tariff dynamics, we are poised to not only maintain but improve our financial health.

Our strategy for 2026 includes generating further cost savings by increasing efficiencies in our core operations, enabling us to combat inflationary pressures while reallocating resources into strategic growth investments. This approach is designed to deliver a third consecutive year of profitable sales growth and robust cash flow generation, enabling us to continue capital investments and enhance shareholder returns. I want to note that our guidance today reflects tariff rates under the IEPA regime and therefore does not contemplate the recently announced Supreme Court ruling and subsequent Section 122 announcement. These recent events were not contemplated in our original plans for fiscal year 2026.

If the Section 122 tariffs stay in place for the year or expire in July, we do believe there could be an incremental benefit to our current plans. With many scenarios still being debated, we are awaiting more clarity before changing our plans. At this time, we expect any benefit to Q1 to be minimal based on the timing of receipts. In the meantime, our teams are continuing to leverage the extensive tariff mitigation strategies we have built out over the past year, which sets us up for the annualization of last year's tariffs to be net neutral to 2026 full-year operating income, as previously disclosed.

As noted in today's earnings press release, our outlook excludes the net estimated gain related to a legal settlement in the first quarter, as well as the pledged charitable donation of approximately $50 million to a combination of The Gap Foundation and our donor-advised fund, which we are pleased to make as we look to advance our purpose. Both are included in our reported EPS guidance for fiscal year 2026. As I take you through the details of our 2026 outlook, I will spend some time unpacking the factors that shape the year, as there is some nuance to the quarterly cadence related to the timing of tariffs and investments.

Let us jump into the full year. Starting with revenue, we expect net sales growth of approximately 2% to 3% year over year. While there are a range of outcomes for each of our brands, we expect continued comp sales growth across our three largest brands and negative mid- to high-single-digit sales declines for Athleta in the first half of the year, and the team is hard at work on the second half. Turning to gross margin. We are proud of the underlying gross margin performance achieved in 2025 and expect gross margins to be flat to up slightly year over year in 2026 compared to 40.8% last year.

This includes a balanced plan of realizing higher AURs through better sell-throughs and lower discounting, as well as implementing adjusted sourcing strategies as we offset the tariff impact that annualizes in the base this year. Regarding tariffs specifically, the net tariff impact is expected to be neutral on the full year. Our sourcing strategies build sequentially through the year, resulting in an approximately 150 basis point headwind to the first-half gross margin that turns to an approximately 150 basis point tailwind in the second half of the year. Specific to the first half, we expect a 200 basis point headwind to Q1, which improves to approximately a 100 basis point headwind in Q2.

Separately, as we conclude our multiyear program of rationalizing our store footprint and begin to reaccelerate our capital expenditures, expect ROD as a percentage of sales to deleverage slightly.

Moving on to SG&A. We expect adjusted SG&A as a percentage of sales to be roughly flat year over year. Our focus is on further improving our cost structure, aiming to achieve around $150 million in incremental savings by enhancing efficiency and effectiveness in 2026. These savings will help us manage inflation and reinvest in more valuable initiatives, such as expanding into new categories and capabilities like beauty, accessories, fashiontainment, and technology, as Richard mentioned. We initiated our growth accelerator investments in 2025, particularly in the latter half of the year. These will continue into 2026, initially causing some SG&A deleverage in the first half.

However, we anticipate SG&A to leverage in the second half as we lap the higher spend in the back half of last year. Taking this all into consideration, we expect an adjusted operating margin of about 7.3% to 7.5% for the full year. Interest income is expected to be approximately $10 million to $15 million. We expect a tax rate of approximately 27%. Reported EPS is expected to be $2.71 to $2.86, which includes an estimated $0.51 benefit related to a legal settlement in the first quarter, net of the $50 million charitable donation. We expect an adjusted EPS of $2.20 to $2.35, representing growth of 4% to 10% year over year.

Our healthy balance sheet supports our balanced capital allocation framework, with the primary goal of enhancing long-term shareholder value. The framework remains as follows. Our first priority is investing in the business through high-returning capital investments. In 2026, we expect to invest approximately $650 million related primarily to our investments in stores, technology, and supply chain. Second, we believe in paying an attractive dividend that grows with net income growth. In alignment with that principle, we recently announced that the Board raised the first-quarter dividend by approximately 6% to $0.175 per share. And our third priority is focused on share repurchases. Previously, we aimed to simply offset dilution.

We are now committed to executing a repurchase program with a goal of driving slight accretion. On that note, the Board has approved a new $1.0 billion share repurchase authorization that we expect to utilize to meet this goal.

Now let me turn to our outlook for 2026. The quarter is off to a good start, and our outlook contemplates our quarter-to-date performance. We expect net sales in Q1 to be up 1% to 2% year over year. This includes an approximately 150 basis point spread where comp outpaces net sales, largely related to lapping last year's benefit from our credit card agreement, which continues into Q2 but does not impact the back half of the year. We expect first-quarter gross margin to be down about 150 to 200 basis points compared to last year's gross margin of 41.8%, including an estimated 200 basis points of net tariff impact.

This implies an underlying gross margin of flat to up 50 basis points. And we are planning for adjusted SG&A as a percentage of net sales to be about 35%, which reflects the timing of the growth investments I spoke to earlier.

Reflecting on 2025, I am proud of our accomplishments. Our consistent execution over the past two years has laid a solid foundation, driving our confidence as we advance in our transformative journey. As we transition into 2026, we are excited to amplify our core strengths while fostering new opportunities, strategic growth accelerators, and innovative capabilities. Our balance sheet is giving us the ability to invest purposefully in our business and accelerate cash returns to shareholders. With demonstrated progress and an exciting roadmap ahead, we are building a high-performing company that stays focused on delivering sustainable, profitable growth and long-term value for our shareholders. We will now open for questions. Operator?

Operator: As a reminder, if you would like to ask a question, press star, then the number 1 on your telephone keypad. To withdraw your question, simply press 1 again. We kindly ask that you limit yourself to one question for today's call. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Mark Altschwager with Baird. Please go ahead.

Mark Altschwager: Good evening. Thank you for taking my question. Richard, you outlined several growth accelerators with beauty, accessories, fashiontainment, technology. Can you talk about how you are balancing investments to maintain momentum in the core while also seeding growth in these new areas? And how much can these accelerators move the needle in 2026 from a revenue perspective?

Richard Dickson: Thank you for that question. First off, it is important to note we delivered a successful fourth quarter, marking another year of meaningful progress for the company. We achieved our second consecutive year of top-line growth, and that is the eighth consecutive quarter of positive comparable sales. Now these are really important to acknowledge as we sort of zoom out and look at our transformation roadmap, which has three phases. The first phase was fixing the fundamentals. We are now moving into building momentum, and the third phase is accelerating growth.

Over the past two years, during our fixing the fundamentals phase, the meaningful progress that we have made across our strategic priorities has really enabled us to consistently perform while we have been transforming, strengthening our financial model, essentially driving shareholder value. It is this performance that is giving me the confidence as we continue to move forward, and that means moving forward into the next phase of our transformation that we call building momentum. Now in this next phase, our primary focus is going to be growing our core apparel business. We have to do it through continuous improvement. That means driven by disciplined execution, better product, better marketing, better storytelling, better in-store execution.

Now in parallel to that, we are going to be thoughtfully seeding our growth accelerators, which you mentioned, and, by the way, new capabilities. The first, which we have talked about, is expanding our presence in lifestyle categories such as beauty and accessories. Now these are two underdeveloped categories in our portfolio that are meaningful to our consumers but are also sizable in the industry. Second, rebuilding our fashiontainment platform, and we are advancing our technology capabilities. Now when you combine the context of continuous improvement of our core business delivering low- to mid-single-digit growth with the accelerators beginning to scale in 2027 and beyond, it really creates an exciting growth proposition.

We are obviously very excited about where we are right now and will look to provide updates on how this will evolve not only from our business perspective but the economic model in the long term. But overall, the aspirations remain very high, and I am looking forward to all we can accomplish. And maybe Katrina has more to say on the balance of the question. Yeah. I mean, Mark, I am happy to talk about how we are thinking about the investments.

Katrina O'Connell: This is really an exciting time for the company as we are balancing the rigor that we have put into the business that is driving real value with the growth opportunities that are really important to the long-term success of the company. So our guidance today reflects what we think is a very balanced approach where we are continuously improving the cost structure of the company. As I said, we are aiming to drive an incremental $150 million in savings. And then we are looking to really repurpose those into making investments in these seed categories that Richard just talked about like beauty, fashiontainment, accessories, and technology.

And as a result, we think our outlook that we presented today has SG&A as a rate of sales flat year over year. I would say this is what it means to be a high-performing company that strives for continuous improvement. And maybe the last thing I will add—Richard said, you know, this is really early days. We are seeding. We are doing a lot of work to get teams in place and begin to get these in front of customers. But I think the bigger portion of these will start to deliver in 2027 and beyond.

Mark Altschwager: Thanks. Thank you. A quick follow-up for Katrina on gross margin. Just with respect to the Q1 guide, you do not seem to be incorporating much in terms of offsets to the 200 basis point tariff headwind, whereas you have been able to offset much of that headwind through the back half of 2025. So I was hoping you could just walk us through some of the other gross margin puts and takes there. Thank you.

Katrina O'Connell: Sure. Yeah. Thanks, Mark. So for gross margin, as you say, in Q4, margin decreased 80 basis points year over year, and that was inclusive of a 200 basis point tariff impact, which implies that the underlying gross margin was much stronger. That was driven by AUR growth and our customer really responding to our product and our storytelling, which led to lower discounting and ultimately contributed to very strong underlying gross margin expansion. In addition to that, we saw ROD leverage in the quarter of about 10 basis points as a result of higher sales. As we move into Q1, I would say there are two things. We gave a guide of down 150 to 200 basis points.

The outlook does include the net tariff impact of about 200 basis points, so very similar to Q4. I think you heard me say on the call, and we previewed this last time, our sourcing strategies are going to build sequentially throughout the year. So the 200 basis point impact in Q1 becomes about 100 in Q2 and actually flips to a tailwind, all net neutral on the full year. So there is a little bit of a cadencing of the tariff. And then maybe the two other things I will call attention to in Q1 are that promotions right now are assumed to be relatively flat year over year, whereas we did see improvement in Q4.

So we will see. We are taking a balanced approach. And then maybe lastly, we saw leverage on ROD in Q4, and I think you heard in my prepared remarks we will see slight deleverage in Q1 on ROD.

Operator: Your next question comes from the line of Matthew Boss with JPMorgan. Please go ahead.

Matthew Boss: Great. Thanks. So, Richard, on the inflection at the Gap brand to growth mode that you cited, what do you see as the next leg or opportunity to accelerate market share in the next strategic phase? And then, Katrina, just to confirm, your 1% to 2% revenue growth forecast for the first quarter embeds a 150 basis point headwind from the credit card adjustment, so underlying revenue growth would be 2.5% to 3.5%, actually an acceleration from 2.1% in the fourth quarter. Can you just break down the areas of underlying sequential acceleration that you are seeing and embedding and maybe elaborate on the strong start to the quarter at Gap and Old Navy?

Richard Dickson: Okay, Matthew. Thanks for the question. I will take the first part, and then Katrina will take the second. First off, thank you for calling out the Gap brand. It has been really exciting to see Gap—of course, our namesake brand—building on the success quarter after quarter. So to your point, we have already begun to comp the comp, achieving an impressive 7% comp on top of last year's 7%. The fourth quarter also marked the brand's ninth consecutive quarter of positive comps. So when you look at the last two years, Gap has consistently gained market share.

Now it is through compelling product assortments, better marketing, and in-store execution, and it is results like this that also increase our multigenerational appeal. We have seen growth across all income cohorts, with more high-income customers choosing Gap. We have had strength in key categories like fleece, including logo. Denim has been outstanding, and, of course, sleepwear drove the performance in the fourth quarter. And as brand relevance has increased, we have also meaningfully pulled back on discounting. I also want to add it was really exciting to see the brand gain share in denim in 2025. We have increased our ranking to number six. Now that is up from number 10 just two years ago.

And overall, the brand's momentum is giving us the confidence to also accelerate the rollouts of our new store formats in the years ahead, which will also continue to excite consumers. So all in all, you know, Gap is firmly back in the conversation as a true pop culture brand. Its product resonance is showing up on the red carpets to surprising collaborations, and I can guarantee you there is a lot more exciting moments to come in 2026.

Katrina O'Connell: And then, Matt, as it relates to Q1 revenue, so, yes, the guide was 1% to 2% revenue growth. Then as you say, we have about a 150 basis point headwind that makes comps outpace total revenue, and so the implied comp guide is 2.5% to 3.5% for the quarter. The way I think about it is the midpoint of that at 3% is roughly in line with the 3% we just delivered in Q4. So largely a continuation of the trends in the business. As it relates to Q1 quarter to date, as I shared, the quarter-to-date comp is off to a good start, and that is built into the outlook that we provided today.

This time of year, there are always weather dynamics at play and all of this stuff, but we are largely trending in line with the guidance we just gave. And then as I think about the brands in the quarter, to be helpful, I would say this. Old Navy, as Richard said, is proving to be a reliable growth brand and two years of delivering positive three comps. So we will see where the quarters land, but I see them as a very consistent driver of value. Gap is firmly in growth mode. Banana has three quarters of comp, and we are really excited to see BR deliver.

And then as I said in my remarks, Athleta—we are expecting negative mid- to high-single-digit sales declines in the first half of the year, and the team is really working on the second half.

Operator: Thanks, Matthew. Your next question comes from the line of Simeon Siegel with Guggenheim. Please go ahead.

Simeon Siegel: Thanks. Hey, everyone. Good afternoon. Richard, any color you can share on store sales by brand, how you are thinking about that going forward? I guess, basically, I am curious if you think the culturally powerful campaigns you guys are running should bring more people into the stores next year. I guess whether that is even something you are targeting or whether you are channel-agnostic. And then I would be curious to hear—the beauty sounds really exciting—curious to hear the learnings and the refinements that you were mentioning about Old Navy Beauty, that comment, and whether you think this becomes a visitation driver or more of a UPT add-on. Thank you.

Richard Dickson: Sure. Simeon, thanks for the question. Let me start by saying, you know, fashion is entertainment, and today's customers are not just buying apparel—although, of course, our product has to meet and exceed their expectations—but they are buying into brands that tell compelling stories and drive cultural conversation. As we continue to build our brands, we see this intersection of fashion and entertainment—our fashiontainment platform—as a powerful growth lever. The creative assets that you have been seeing and that we have been developing across our brands have evolved to specifically drive relevance and increase engagement. We have been leveraging music, art, dance, film.

These are all forms of entertainment, and whether it is a music video with Cat's Eye or a fashion show during the NBA All-Star Weekend, you know, these are great examples of fashiontainment. We are serious about it. We appointed Pam Kaufman as our Chief Entertainment Officer to lead our fashiontainment platform as we take it to the next level. We are going to be adding incredible expertise, essentially extending our iconic IP into more experiences and product opportunities that drive relevance and revenue. These campaigns, as you call out, they are designed to drive interest.

And the more interesting we become, the more exciting it becomes for consumers, and the more traffic we drive each year to our omnichannel experiences. As we look at some of the ways that we think about stores, this is a really important way for consumers to experience our brands. They bring product and storytelling and service to life in ways that digital cannot, and I would say we are now at a very pivotal point. The fleet is well positioned. We have been testing new formats and experiences—Gap Flatiron, Chestnut Street here in San Francisco, Banana Republic SoHo.

Given Gap's brand momentum, we have the confidence to start to accelerate the rollouts of our new store formats in the year ahead, which we believe will also really excite consumers. You asked about beauty. So this is also a really exciting extension. Beauty is one of the fastest growing, most resilient retail categories in the U.S., and our consumer insights reinforce strong demand across other fashion apparel retailers with a beauty offering. The category represents anywhere from between 5% to 20% of their sales, highlighting the meaningful potential that this category can represent within our business over time. Also important to recognize, we have been in this category.

We just have an underdeveloped beauty business, and based on the insights that we have learned, we have a lot of potential in this category. So in 2025, we announced our plans for strategic expansion into the category with a phased approach, starting with Old Navy in the fourth quarter, and Gap will be relaunching its fragrance later this year. The beauty collection was piloted in 150 stores in the fourth quarter. We had some select offerings in dedicated shop-in-shops. The pilot validated strong consumer interest, confirmed that beauty really enhances engagement; it is basket-building, and it is exciting our customers. And you will hear a lot more about it as we move forward.

Operator: Your next question comes from the line of Brooke Roach with Goldman Sachs. Please go ahead.

Brooke Roach: Good afternoon, and thank you for taking our question. Richard, Katrina, can you speak to the AUR versus unit growth trends that you are seeing at the Old Navy banner in fourth quarter and your expectations for net pricing growth at Old Navy for 2026? Additionally, Richard, I would be very curious to see if there are any apparel category initiatives that you have in place at that brand that could shift the Old Navy brand further into growth mode in 2026. Thank you.

Katrina O'Connell: Brooke, maybe I will start off. I will not speak probably specifically to Old Navy, but I will certainly talk at the corporate level. For both fourth quarter and fiscal year 2025, we saw average unit retail growth, which reflected the consumers continuing to respond to our product and our value and our storytelling. In addition to that, both for fourth quarter and the full year, units were flat to up slightly, and we also saw traffic positive. So exciting to see winning on all of those metrics. Maybe as I talk a little bit more broadly about pricing, you know, we approach pricing as we always do.

We consider all the various inputs while maintaining, most importantly, the overall value proposition for our consumers. I think we know that we are doing this well as we evaluate the consumer's response to our value equation, which is showing up in eight consecutive quarters of positive comp sales, continuing to gain share, and winning across all income cohorts. So our ability to grow AUR in Q4 and for the full year really gives us confidence that our strategies are working. As I look into 2026, the AUR growth that is embedded in our 2026 plan is roughly in line with how we have been delivering in 2025.

So it reflects a balanced plan of realizing higher AURs through better sell-throughs and lower discounting.

Richard Dickson: And, Brooke, I will talk a little bit about the question related to the categories and potential growth accelerators. But first, I just want to reiterate, you know, we delivered another strong quarter for Old Navy, and importantly, this has been consistent share gains over the last two years. It is a great reflection of the brand's strength and reliability, and we continue to win at the intersection of great product, quality, and price, and we are winning across all income cohorts. Now, even more specifically, we called out years ago that we were going to focus on category leadership in certain categories—denim, active, and kids and baby. These have really been driving the strength of the brand.

In both denim and active, Old Navy gained share for the second year in a row. We rank as the number three denim player in the country and the number five in active. The broad-based selection and relevant denim offerings are really establishing Old Navy as a denim destination, and we believe that we have a lot more room to grow. Our innovation and price value are really enabling Old Navy to win in the active space, which is already an enormous business—the number five player in the space and growing share and outpacing the rest of the brand—and you are going to see a lot more excitement from us in this category going forward.

In kids and baby, Old Navy continues to be the brand leader in kids and baby. We rank as the number two brand in the country. I think I have shared our partnership with Disney as such a great partnership, but we recently became Disney's number one apparel direct-to-consumer partner in the U.S. So from a licensing and strategic partnership perspective, there is enormous opportunity for us to continue to go after in relation to the kids and baby market, using entertainment and entertainment properties as a lever.

We are very well positioned to deliver the consistent performance that you have been seeing, building on the strength demonstrated over the past two years, and I think it is a very reliable brand with an aspiration to accelerate our growth longer term. We will focus on these categories that I mentioned, but by no means are those the only categories that we intend on growing.

Operator: Next question comes from the line of Dana Telsey with Telsey Group. Please go ahead.

Dana Telsey: Hi. Good afternoon, everyone. Of the interesting things is that with the return to growth this year, the commentary that it will be flat net store closures versus last year—I believe it was just over 30. How you see, and you mentioned in the CapEx, technology seemed to be more front and center than stores. How you are thinking of the store portfolio and growth and the CapEx investments, and how does it differ by brand? Thank you.

Richard Dickson: Thanks, Dana. I will start and then Katrina can fill in a little bit. And as I mentioned before, you know, stores are such an important way for our customers to experience our brands. Obviously, they bring great product, storytelling, and service to life. It is an omnichannel experience as we connect the digital dialogue with our in-store dialogue. With a company like ours operating a fleet of nearly 2,500 stores, we are always optimizing our retail footprint. We are closing underperforming stores, as you know. We are repositioning some locations that are more relevant to our customers, and we are always evaluating new store openings.

To your point—you know this well—we have closed over 350 stores that were unprofitable over the last few years. Last year in full-year 2025, we had approximately 35 net closures across our portfolio, and we expect net closures to be flat in fiscal 2026. The majority, by the way, of those closures were at Banana Republic. Again, as I mentioned before, we are really at a pivotal moment now. Our fleet is really well positioned.

We have been experiencing new formats and new experiences with our brands, particularly Gap in Flatiron and Chestnut and a variety of other locations—great success that is giving us the confidence that now we can accelerate these rollouts of new store formats in the year ahead, which we believe will continue to excite our customers and also essentially grow our business. As we have evaluated the store performance that we have tested in new formats, we have really got confidence in the revenue and relevance and the strong returns they are driving.

We are very much focused on the experience for our customers, and I do believe we are at a really exciting point, again, in our transformation of fixing a lot of the fundamentals and now moving into continuous improvement to build momentum and celebrate these stores and new store formats. I will turn it over to Katrina for the rest.

Katrina O'Connell: Yeah. And, Dana, as it relates to capital, we are looking to increase capital expenditures this year. We are expecting to spend about $650 million this year. As you say, the big areas where we are spending capital are around technology, on our stores, as Richard just said, and then also on our supply chain. The increase year over year really is much more related to our stores and technology increases. And the store increases are very much related to a lot of these experiential things that we are starting to accelerate, where the tech investments are really up in some of these new capabilities that are AI-driven as well as RFID.

So, hopefully, that helps as we think about capital this year.

Operator: That concludes our question-and-answer session. I will now turn the call back over to Richard Dickson for closing remarks.

Richard Dickson: Thank you, Operator. As we close the first chapter of our transformation and step into the next, we do so with a brand portfolio that is consistently growing, healthy gross margins, disciplined expense management, sustained bottom-line performance, and strong cash on hand. Looking ahead, we have a focused, energized team that believes in the future that we are building. Our aspirations remain high. We are positioned to deliver, and I am excited about the opportunity ahead and confident in our ability to capture it. I want to thank our entire organization and all our partners for all of their efforts this quarter and throughout the year, and we look forward to our next call. Thank you.

Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect. And we are.

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