GAP Q4 Earnings Call Highlights

Gap Inc. fourth-quarter fiscal 2025 results extended the company’s recent run of positive comparable sales, with management highlighting continued brand momentum and a multi-year transformation that is shifting from “fixing the fundamentals” to “building momentum.” On the company’s earnings call, executives also detailed the impact of tariffs on margins, capital allocation plans, and a set of “growth accelerators” intended to complement its core apparel business.

Fourth-quarter performance and brand results

GAP (NYSE:GAP) reported fourth-quarter net sales of $4.2 billion, up 2% year-over-year, with comparable sales up 3%. CEO Richard Dickson said the company delivered comp sales of 3% in the quarter, marking its eighth consecutive quarter of positive comps, while “winning across all income cohorts.” CFO Katrina O’Connell said results were in line with plans despite disruption from “expansive store closures due to extreme weather at the end of January.”

By brand, O’Connell reported:

• Old Navy: Net sales of $2.3 billion, up 3%, with comparable sales up 3%.
• Gap brand: Net sales of $1.1 billion, up 8%, with comparable sales up 7% (on top of last year’s 7% comp growth).
• Banana Republic: Net sales of $549 million, up 1%, with comparable sales up 4%.
• Athleta: Net sales of $354 million, down 11%, with comparable sales down 10%.

Dickson said Old Navy continued to perform at the “intersection of great product, quality and price,” highlighting strength in active, denim, and kids and baby. He also pointed to the brand’s Disney partnership, saying it has positioned Old Navy as Disney’s “number one apparel brand direct-to-consumer partner” in the U.S.

At Gap brand, Dickson described accelerating momentum and increased cultural relevance, citing category strength in fleece (including logo), denim, and sleepwear. He also said the company saw “elasticity” as it pulled back discounting for a second quarter, supported by on-trend product and brand “heat.”

Banana Republic delivered its third consecutive quarter of comp growth, with Dickson emphasizing sharper merchandising and a return to storytelling centered on the “modern explorer.” Athleta, by contrast, remained a “work in progress,” though Dickson said the company took decisive action in the second half of 2025 with a leadership change and is “re-architecting the assortment” around enduring franchises and consumer insights.

Margins, tariffs, and fourth-quarter profitability

O’Connell said tariffs were a major factor in 2025 results. She stated that changes in global tariff rates in 2025 affected fiscal-year gross and operating margins by approximately 120 basis points and impacted fourth-quarter gross and operating margins by about 200 basis points.

In the fourth quarter, gross margin was 38.1%, down 80 basis points year-over-year. O’Connell said lower discounting contributed to average unit retail (AUR) growth, but merchandise margin was down 90 basis points due to the net impact of tariffs. SG&A was $1.4 billion, with SG&A as a percentage of net sales at 32.7%, deleveraging 10 basis points versus last year. Operating margin was 5.4%, down 80 basis points, and earnings per share were $0.45 compared to $0.54 a year earlier.

Full-year results and cash flow

For fiscal 2025, the company reported net sales of $15.4 billion, up 2% year-over-year, with comparable sales up 3%. O’Connell said gross margin was 40.8%, down 50 basis points, with merchandise margin down 80 basis points due to tariffs and rent/occupancy/depreciation (ROD) leveraging 30 basis points. SG&A was $5.2 billion, or 33.5% of net sales, leveraging 40 basis points. Operating income was $1.1 billion, resulting in an operating margin of 7.3%.

O’Connell also detailed balance-sheet strength and cash generation. The company ended the year with $3 billion in cash equivalents and short-term investments, which Dickson noted was the highest cash balance in nearly two decades. Net cash from operating activities was $1.3 billion, and free cash flow was $823 million. Capital expenditures were $470 million in 2025.

Inventory levels at year-end were up 7% year-over-year, which O’Connell attributed primarily to increases in tariff-related cost, while units were down year-over-year. She said the company expects inventory buys to follow its principle of unit purchases “positioned modestly below sales.”

2026 outlook: sales growth, margin cadence, and investments

Management’s 2026 outlook calls for net sales growth of approximately 2% to 3% year-over-year, with continued comp growth across Old Navy, Gap, and Banana Republic, and “negative mid to high single-digit” sales declines for Athleta in the first half of the year. O’Connell said the company expects gross margin to be flat to up slightly versus 2025’s 40.8%, with AUR improvements driven by better sell-throughs and lower discounting.

On tariffs, O’Connell said the net impact is expected to be neutral for the full year, but with meaningful cadence: an approximately 150 basis point headwind to first-half gross margin that turns into an approximately 150 basis point tailwind in the second half. She guided to a 200 basis point headwind in Q1, improving to about a 100 basis point headwind in Q2. She also said guidance reflects tariff rates under the IEEPA regime and does not contemplate a recently announced Supreme Court ruling and subsequent Section 122 announcement, noting any benefit to Q1 would likely be minimal due to receipt timing.

For operating profitability, the company guided to an adjusted operating margin of about 7.3% to 7.5% and adjusted SG&A as a percentage of sales roughly flat year-over-year, supported by plans for about $150 million in incremental savings that will be reinvested into growth initiatives.

Reported EPS guidance for fiscal 2026 is $2.71 to $2.86, which O’Connell said includes an estimated $0.51 benefit related to a legal settlement in the first quarter, net of a pledged charitable donation of approximately $50 million to a combination of The Gap Foundation and the company’s donor-advised fund. Adjusted EPS is expected to be $2.20 to $2.35.

Capital returns, store strategy, and “growth accelerators”

Dickson said the board approved an increase in the first-quarter dividend and a new $1 billion share repurchase authorization. O’Connell said the quarterly dividend was raised by about 6% to $0.175 per share. She also said the company plans to invest approximately $650 million in 2026, primarily in stores, technology, and supply chain.

On stores, Dickson said the company operates a fleet of nearly 2,500 stores and has closed over 350 unprofitable stores in recent years. He said fiscal 2025 saw about 35 net closures across the portfolio and that net closures are expected to be flat in fiscal 2026, adding that the majority of 2025 closures were at Banana Republic. Management pointed to testing new store formats—including locations in Flatiron and Chestnut Street for Gap and a Soho store for Banana Republic—and said new models are outperforming, supporting plans to accelerate rollouts.

Looking beyond core apparel, Dickson outlined growth initiatives in beauty, accessories, Fashiontainment, loyalty, and AI-driven technology. He described beauty as a fast-growing category and said the company piloted a beauty collection at Old Navy in 150 stores in the fourth quarter, which he said validated consumer interest and supported basket-building. He also said Gap plans to reintroduce a fragrance assortment in summer 2026. In accessories, Dickson said the category performed well in 2025 and the company plans to launch an expanded accessory line for holiday.

On Fashiontainment, Dickson said Pam Kaufman joined as Chief Entertainment Officer and the company aims to expand licensing and partnerships and align assortments to the entertainment calendar. He also highlighted the company’s loyalty program, citing nearly 40 million active members and the launch of “Encore,” which he described as a shift from a points-based program to a broader engagement platform built around experiences across brands.

About GAP (NYSE:GAP)

Gap Inc is a global specialty retailer renowned for its portfolio of apparel and accessories brands, including Gap, Banana Republic, Old Navy and Athleta. The company designs, sources and markets clothing across a broad price range and style spectrum, catering to men, women and children. Its offerings extend from everyday wardrobe essentials such as denim, tees and outerwear to performance and lifestyle pieces, reflecting each brand’s distinct identity and price point.

Founded in San Francisco in 1969 by Donald and Doris Fisher, Gap Inc has grown into one of the world’s largest apparel companies.