Shares of The Gap Inc. surged more than 13% Friday after the apparel retailer reported second-quarter earnings that topped Wall Street expectations and raised its full-year profit guidance, capping a report that also included the announcement of new leadership at its struggling Old Navy brand.
The stock was trading at 23.53 dollars, up 2.74 dollars, or 13.20%, as of 11:41 a.m. Eastern time on the New York Stock Exchange, extending gains from premarket trading that had pushed shares up as much as 16% earlier in the session.
Gap reported adjusted earnings of 52 cents per share for the quarter, beating the average analyst estimate of 49 cents, according to figures compiled by Investing.com. Revenue came in at roughly 3.7 billion dollars, matching consensus estimates but down 2% from the same period a year earlier. Net income for the quarter reached 501 million dollars.
Despite the revenue decline, the company’s profitability outperformed expectations. Adjusted operating margin reached 7.1%, while adjusted gross margin rose to 41.4%, up 20 basis points from a year earlier, driven largely by an 80-basis-point expansion in merchandise margin. Comparable sales across the company fell 1% for the quarter.
Performance varied sharply across Gap’s four main brands. The namesake Gap brand was the standout, posting comparable sales growth of 10% and net sales of 844 million dollars, a 9% increase from the prior year. Banana Republic also grew, with net sales up 1% to 478 million dollars. Old Navy, the company’s largest brand by revenue, saw net sales decline 4% to 2.1 billion dollars, while Athleta, Gap’s activewear label, posted a steeper 12% drop in sales to 264 million dollars.
In a statement accompanying the results, Gap President and Chief Executive Officer Richard Dickson addressed the mixed performance directly. “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,” Dickson said.
On the company’s earnings call, Dickson also acknowledged the challenges facing Old Navy specifically, saying, “At Old Navy, as we previewed on last quarter’s call, seasonal categories continued to weigh on performance. While we took actions to address this as the quarter progressed, we also experienced a slowdown in traffic, which led to a modest miss versus our expectations.” He said the company expects seasonal pressure at the brand to ease in the third quarter, with a renewed focus on denim, activewear, sweaters and knits.
Alongside the earnings report, Gap announced that Michael Francis will become president and chief executive officer of Old Navy, effective Nov. 2. Investors welcomed the leadership change as part of a broader effort to revive the brand, which has lagged behind Gap’s namesake label in recent quarters.
Looking ahead, Gap raised its full-year adjusted earnings-per-share guidance to a range of 2.35 dollars to 2.45 dollars, up from its previous forecast of 2.30 dollars to 2.40 dollars. The company also lifted its adjusted operating margin guidance to approximately 7.4% to 7.6%, compared with a prior range of 7.3% to 7.5%. At the same time, Gap narrowed its full-year net sales growth forecast to a range of 1% to 1.5%, down from its earlier projection of 1% to 2% growth.
For the third quarter, the company said it expects revenue growth of 1.5% to 2.5% compared with the 3.9 billion dollars reported in the same period last year, along with gross margin expansion of 25 to 75 basis points.
Gap executives also addressed the impact of tariffs on the business during the earnings call. Following a Section 301 tariff announcement on July 23, the company said it is now extending a 10% tariff-rate assumption through the end of August, providing approximately 15 million dollars of incremental net tariff relief for the year, mostly to be realized in the fourth quarter. If the 10% rate holds through the end of the third quarter, the company estimated it could see an additional 35 million dollars in tariff-related benefit.
Wall Street’s reaction to the results was mixed despite the stock’s sharp rally. Bank of America reiterated its neutral rating on Gap following the report, with analysts saying they were “encouraged by momentum at Gap but remain concerned that Old Navy’s lower-end customer will continue to be pressured by the tough macro climate.”
The earnings beat comes after a volatile stretch for Gap shares, which had faced a series of analyst downgrades in the weeks leading up to the report. Jefferies downgraded the stock to hold from buy on Aug. 17, and Barclays issued a similar downgrade earlier in the month, citing caution ahead of the results. Friday’s rally reversed much of that negative sentiment, at least for the session, as investors focused on the strength of the flagship Gap brand and the company’s improved profitability outlook.
The results mark the latest data point in Gap’s broader turnaround effort under Dickson, who has focused on reinvigorating the company’s core brands through updated marketing, product design and leadership changes. The addition of Francis at Old Navy is expected to be a key test of whether that strategy can extend to the company’s largest and currently most challenged division.
