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Gap Inc. was founded in San Francisco in 1969 with a namesake store selling records and Levi’s jeans. It has since grown into the largest specialty apparel retailer in the U.S., with brands including Old Navy, Gap, Banana Republic, and Athleta. The company operates 2,500 of its own stores, and franchises around 1,000 locations abroad.

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Gap (GAP): Company Profile, Stock Price, News, Rankings

legacy

Good afternoon, ladies and gentlemen. I would like to welcome everyone to the Gap Inc. First Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. As a reminder, please limit your questions to one per participant.

I would now like to introduce your host, Whitney Notaro, Head of Investor Relations. Good afternoon, everyone. Welcome to Gap Inc. First quarter fiscal twenty twenty five earnings conference call. Before we begin, I'd 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 ks filed with the Securities and Exchange Commission on 03/18/2025, and any subsequent 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, 05/29/2025, 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 reconciliations of financial measures not consistent with generally accepted accounting principles. Joining me on the call today are Chief Executive Officer, Richard Dixon and Chief Financial Officer, Katrina O'Connell. With that, I'll turn the call over to Richard.

Thank you, Whitney, and good afternoon, everyone. The first quarter was another great quarter, during which we delivered what we said we were gonna do, exceeding expectations across key financial metrics. We had positive comp sales for the fifth consecutive quarter, expanded both gross margin and operating margin, and gained market share for the ninth consecutive quarter. We are lapping the early stages of our transformation, and our two largest brands, Gap and Old Navy, are winning in the marketplace and demonstrating the potential of our brand reinvigoration playbook. Old Navy and Gap saw growth across all income cohorts, with Old Navy gaining share in both top and bottom cohorts and Gap gaining share in top and middle cohorts, showing our strategic intent is working.

During the quarter, we increased our year over year e commerce penetration with Gap Inc ranking as the number one apparel e commerce business in The US, reflecting our ability to meet customers where they are. We remain focused on controlling the controllables, driving continuous improvement, and pursuing exciting opportunities as we operate and build this company for long term growth. Our strategic priorities are clear. Our intent is unwavering. And despite a dynamic environment, we're staying firmly on course, and it's showing in our results.

Tariffs are understandably top of mind, so let me take a moment to share how we are approaching this topic. Based on what we know today, we are working to develop plans to mitigate as much of the anticipated tariff impact as possible, taking actions in the short term without compromising the long term integrity of our strategy. We have been successfully diversifying our sourcing footprint for several years, demonstrating the agility and resilience of our supply chain. China, as an example, used to be one of the top sourcing countries for our product. In 2024, it represented less than 10% of our sourcing, and exiting 2025, we now expect it to be less than 3%.

Most other countries represent less than 10%. Vietnam and Indonesia represented 2719% of our sourcing last year, respectively, and our goal is for no country to account for more than 25% by the end of twenty twenty six. We are taking a collaborative approach with our global sourcing partners to maintain and build on the long term relationships we have across our supply chain. Diversification also means near shoring as well as domestic investment. We're planning to double our vendor sourcing of American grown cotton in 2026, with about 90% of our sales in the quarter in The US and an American workforce of over 65,000, investing in The US is an important priority for our business.

Today, we are much better equipped to handle complex headwinds because we have a stronger financial foundation and we are operating with greater discipline, growing brand momentum, and improved platform capabilities. The first quarter was yet another proof point that our strategy is working, and I remain optimistic yet realistic about the opportunities ahead as we navigate a highly dynamic environment. On today's call, as usual, I'll provide an update on our first quarter performance and progress in the context of our four strategic priorities. Then, Katrina will walk you through our detailed financial results and our financial outlook, after which we will open the call for questions. Let's start with our first strategic priority, financial and operational rigor.

Gap Inc. Comparable sales were up 2% in the quarter. Comps at Old Navy, our largest brand, were up 3%. This is the brand's ninth consecutive quarter of market share gains, reinforcing its leadership position as the number one specialty apparel brand and retailer in The US. GAAP comps were up 5%, the sixth consecutive quarter of positive comps, and the brand delivered its eighth consecutive quarter of market share gains.

Banana Republic comps were flat as we continue to focus on reestablishing this premium brand in our portfolio. And as we expected, athletic comps have been challenging, down 8%, and we remain focused on resetting the brand for the long term. We expanded operating margin a 40 basis points versus last year. EPS was $0.51 up 24% versus the first quarter of last year. And we ended the quarter with a strong cash balance of approximately $2,200,000,000 The rigor and discipline we have put into managing the business is serving us well.

Turning to our next strategic priority, driving relevance and revenue by executing on our brand reinvigoration playbook. Our portfolio consists of iconic, trusted brands, each in a different stage of the brand reinvigoration journey. Let's begin with Old Navy. Old Navy is off to a strong start, outperforming in the first quarter with a 3% comp and the ninth consecutive quarter of market share gains. This momentum underscores Old Navy's growing relevance with customers and the team's continued rigor of execution.

We are bringing more innovation, style, and value in 2025, and the brand's category leadership drove its Q1 performance, led by active and denim, which are both strategic growth categories for the brand. During the quarter, we continued to advance our strategic pursuit to become the destination for the family as the value player in the active category. Notably, Old Navy continued to gain share in active as the number five player in the category. The launch of our Studio Smooth collection outperformed our expectations, delivering exceptional comfort and value to consumers and marking another step forward in our expansion in the category. And we're not stopping there.

With our active product resonating, we're amping up the storytelling. Earlier this week, we launched the brand's first major active campaign in years, Old Navy, New Moves, which is getting great reception. The brand's q one performance was also fueled by the success of our Trend Right crafted denim collection with styles in loose and barrel fits, embroidery, and braided details. This is another great proof point that great style at great value wins across the family. During the quarter, Old Navy grew share in denim ranking number four in the category.

In women's, we launched a new occasion dress collection supported by a marketing campaign that drove some of the highest reach and engagement on social media to date, an encouraging sign that our product and storytelling are landing with impact. The inspiration for the occasion line was born from customer insights and then informed by Zach Posen's expertise in occasion wear, ultimately creating a versatile collection where standout style meets unbelievable value. Customers responded well to the collection's design and quality, reinforcing the strength of Old Navy's value with strong full price sell through. Kids also had a great quarter, reinforcing our position as a top kids and baby brand in The US, with strength in licensing and graphics. We are continuing to lean into this strategic category with the recent launch of our iconic Summer Americana collection for the family, bringing the brand's first partnership with Disney to life in key markets in June.

We are intently focused on enhancing the customer experience at Old Navy, which is driving higher NPS scores for both stores and online. We're investing in technology that elevates the customer experience, and our phased rollout of AI powered RFID is a great example of how we're bringing smarter operations and sharper service to our stores. We also recently announced plans for Old Navy's next generation flagship in New York's Herald Square, an iconic location for an iconic brand. Opening in 2026, the new store will be a modern expression of Old Navy, bringing our creativity to life through curated assortments and interactive moments designed to better engage customers. We enter the second quarter well positioned with pricing clarity, consistent messaging, and leadership in key categories.

As we lap last year's strongest quarterly comp in q two, we do so with sharper execution, a focused playbook, and a brand that's meeting the customer where they are and where they're going. Now, let's turn to Gap. Gap continues to execute our reinvigoration playbook with clarity and consistency, delivering a standout 5% comp in q one. This marks the brand's sixth consecutive quarter of positive comps and its eighth consecutive quarter of market share gains, clear indications that Gap is resonating with consumers and gaining relevance. Momentum in women's continued to build quarter over quarter, fueling the brand's strong q one performance.

We are building a consistent brand narrative that we are applying with relentless repetition. In q one, this was exemplified through our exciting Feels Like Gap campaign that leveraged music by Meta with a timely feature of Parker Posey. We continued to advance our authority in denim in q one. This is a foundational category for Gap that has been a key pillar of the brand's reinvigoration. We gained share in the category with on trend styles like wide leg, barrel, relax silhouettes, and pull ons, all of which are exciting our customers.

Taking insights from our Flatiron store, we're now rolling out an enhanced denim experience to top locations, a great example of how we're turning insights into action. We also saw strength in key categories like fleece, sweaters, and sleepwear, essentials that are building deeper loyalty and driving brand affinity with our customer. The brand strategy, including collaborations is attracting a new generation to Gap, while reinforcing the brand to those who have loved us for years. We are bridging the generation gap. Collaborations continue to drive relevance and revenue for the brand in the quarter with Harlem's Fashion Row and Dohen contributing to strong new customer response, increased engagement, and meaningful buying beyond the collabs.

The Gap Studio Collection designed by Zach Posen launched last month and is also bringing excitement and buzz to the brand. As Gap brand's highest expression of style, craftsmanship, and quality, Gap Studio showcases expert tailoring, intricate details, and a modern take on American style. Initial response has been positive with strong sell through at full price, demonstrating the brand's elevated design direction and generating over 1,300,000,000 impressions so far. All of these collabs are showing strong attachment rates with customers adding other Gap products to their basket. We are testing the brand's elasticity as we push the boundaries of our pricing power through some of these programs.

The strength of the Gap brand is clear and reflects increasing brand relevance and growing connection with our customers. With its strong execution of our playbook, we believe Gap is well positioned to continue this momentum. At Banana Republic, we continue to focus on reestablishing the brand and we are encouraged by the ongoing progress. We delivered a flat comp for the quarter with fundamentals improving and new proof points emerging. The underlying health of the business is strengthening, with a pricing architecture that is taking hold.

Men's continued to perform well, driven by key items, and we are pleased by improving performance in women's, particularly in coats, skirts, and pants. Having made progress on fit and style, we are now focusing on greater alignment in design and merchandising across men's and women's, which we believe will cultivate broader appeal. The White Lotus collaboration was a standout, generating over 3,000,000,000 impressions and bringing new customers into the brand while staying true to the brand's aesthetic. This has been one of Banana Republic's most impactful collaborations yet. Banana's narrative based storytelling is personifying the brand well through the lens of travel, adventure, and modern exploration.

And the brand's marketing is becoming more efficient and effective as we continue to lean into our social first influencer strategy. We continue to strengthen the foundation of Banana Republic and with each quarter we are seeing clearer signs of brand progress and customer engagement. Shifting to Athleta. As we shared last quarter, we are resetting the brand and we know that we have more work to do. In Q1, we continued to work through the over rotation we discussed last quarter towards new, more trend forward customers.

While we were successful in bringing new customers in the quarter, we still did not have enough compelling products to appeal to our existing customer base, and that showed in the brand's performance. As we said on our fourth quarter call, we expect this year to be choppy as we focus on fixing the fundamentals, and this is reflected in our outlook. Athleta is a purpose driven, women centric brand, rooted in the power of She and has a valuable place in both our portfolio and the industry. We are investing in design talent, and as we build out the team, we are working to find the right balance across the assortment, delivering product that blends fashion, function, and brand relevance. But this will take time.

There's more work to do, and we are committed to taking the necessary steps to reset the brand. Moving to our third strategic priority, strengthening the platform. As we shared on our last earnings call, we continue to prioritize technology investments as a key lever to drive efficiency, elevate the customer experience, and position us for long term growth. We aspire to be a human centered, digitally enabled organization, and we're fortunate to be operating in close proximity to the Bay Area's world class tech community. We are actively engaging with leading tech companies as we continue to modernize our organization with exciting opportunities to drive innovation across our business, and we look forward to sharing more as these initiatives progress.

We're focused on building the right tools to power growth, advancing inventory management, digital product creation, AI enabled capabilities to power customer and employee experiences, and strengthening our e commerce engine with a sharper focus on customer insights and loyalty. Our rigor and the strength of our balance sheet allows us to go on offense, investing in the capabilities, infrastructure, and our brands that will fuel growth for years to come. Behind every great strategy is a strong culture. Gap Inc. Is a fifty five year old company that has navigated its fair share of disruption, and at the heart of that endurance is our culture.

It's one defined by creativity, resilience, and a deep sense of purpose. These are driving impactful outcomes for our business. Today, we are a much stronger company, not just operationally, but culturally. We're building a more united, focused, and energized organization, One that's rooted in values, driven by talent, and inspired by the belief that great brands can shape culture and connect deeply with consumers. We've made real progress on the fundamentals of the business, but what sets us apart is our people.

Their dedication, agility, and belief in what we're building together. That culture is our superpower, and it's what will carry us forward. We delivered the first quarter with the same clarity of purpose and operational discipline that's becoming a hallmark of how we run the business. The rigor we've embedded across the organization continues to serve us well. We have a powerful portfolio of brands that matter, and we're proving that they can matter even more.

Our strong supply chain, resilient teams, and sharp focus on controlling the controllables has enabled us to manage expenses effectively and meet our bottom line objectives. Looking ahead, I'm confident in our path forward, not just because of the results that we've achieved, but because of the team that's delivering them. I want to thank our employees for their ongoing commitment and our partners for their continued collaboration. With a strong financial foundation and a more united culture, we believe we are well equipped to navigate this complex, dynamic environment. We are making steady progress executing our strategy, and we remain focused on building a high performing company that drives shareholder value creation over the long term.

I'll now turn the call to Katrina for a closer look at our financials.

Thank you, Richard, and thanks everyone for joining us this afternoon. In the first quarter, we once again exceeded financial expectations, demonstrating that the meaningful progress we've made on our strategic priorities is translating into strong results. The disciplined approach we've implemented throughout the business led to sales growth, gross margin improvement, SG and A efficiency, and earnings gains in the quarter, further strengthening our solid balance sheet. The revitalization of our brands, combined with continued financial and operational discipline, is enabling us to perform while we transform, consistently delivering on our commitments and strengthening overall performance. Our strong first quarter results reinforce our confidence in the fundamentals of the business, which is enabling us to reaffirm the net sales outlook for fiscal year twenty twenty five.

That said, as trade policy evolves, we remain mindful of the impact of tariffs on our financial outlook for the remainder of the year. In a moment, I'll share more details on our guidance, which reflects both the strength of our execution and brand momentum while separately providing our view on the new headwinds from shifting trade policy. First, I'll share some key highlights from the quarter. It's been energizing to see our brand reinvigoration continue to drive results with net sales and comparable sales both up 2%. Our brands demonstrated progress in driving relevance and revenue, especially Old Navy and Gap with strong market share gains.

We expanded gross margin by 60 basis points and leveraged SG and A 90 basis points versus last year. This resulted in an operating margin of 7.5% for Q1, a 140 basis point improvement compared to last year. And we achieved 24% growth in earnings per share to $0.51 highlighting the earnings power of our business. We returned approximately $131,000,000 to shareholders in Q1 through share repurchases and dividends, demonstrating our commitment to our balanced capital deployment framework. We ended the quarter with $2,200,000,000 of cash, cash equivalents and short term investments, giving us the financial flexibility to continue executing with confidence.

We are reiterating our fiscal twenty twenty five outlook of net sales up 1% to 2% and are still expecting operating income growth in the 8% to 10% range, excluding any tariff impact. We are currently estimating a net impact of approximately $100,000,000 to $150,000,000 to fiscal twenty twenty five operating margin based on current tariff policy. I'll take you through the details of our outlook shortly. Now turning to first quarter results. Net sales of $3,500,000,000 increased 2% year over year with comparable sales up 2% as well.

By brand, starting with Old Navy, net sales were $2,000,000,000 up 3% versus last year with comparable sales up 3%. Old Navy's consistent delivery and execution was notable as they continued to win in key categories like active and denim and gained share. Turning to Gap brand. Net sales of $724,000,000 were up 5% versus last year and comparable sales were up 5%. Gap continued to execute the brand reinvigoration playbook with excellence, driving continued momentum and achieving positive comp sales for the last six quarters.

Banana Republic net sales of $428,000,000 were down 3% year over year with comparable sales flat. We are encouraged by the early signs of progress in our women's performance. Athleta net sales of $3.00 $8,000,000 decreased 6% versus last year, and comparable sales were down 8%. As Richard mentioned, we're working to reset the brand this year and have work to do to improve product and marketing, which will take some time. Let's continue to the balance of the P and L.

Gross margin of 41.8% increased 60 basis points versus last year, ahead of our expectations. Merchandise margin was flat, with the remaining 60 basis points of expansion driven by rod leverage. SG and A was $1,200,000,000 in the quarter, flat to last year as we demonstrate continued rigor in our expense management. SG and A as a percentage of net sales was 34.3%, leveraging 90 basis points versus last year, ahead of our expectations. First quarter operating margin of 7.5% improved 140 basis points compared to last year.

Earnings per share in the quarter were $0.51 up 24% versus last year's earnings per share of $0.41 Now turning to the balance sheet and cash flow. End of quarter inventory levels were up 7% year over year, primarily as a result of earlier receipts and faster transit times. We remain committed to our disciplined inventory management principles, and we believe we ended the quarter with the right inventory composition. We ended the quarter with cash, cash equivalents and short term investments of $2,200,000,000 an increase of 28% from last year, further demonstrating the rigor we've put into managing the business. Capital expenditures in the quarter were $83,000,000 In line with the capital allocation framework I outlined on our fourth quarter call, we returned approximately $131,000,000 to shareholders in Q1 in the form of dividends and share repurchases.

More specifically, we paid $61,000,000 to shareholders in the form of dividends, and the Board recently approved a second quarter dividend of $0.01 $65 per share. We also repurchased 4,000,000 shares during the quarter for approximately $70,000,000 It's important to note that we have $331,000,000 remaining on our share repurchase authorization as we proactively and opportunistically achieve our goal of offsetting dilution. Our strong balance sheet gives us the foundation to focus on capital allocation with the goal of enhancing long term shareholder value. And in this dynamic environment, this also allows us to be thoughtful about the levers we're pulling to mitigate potential headwinds while remaining mindful of pursuing opportunities for growth. Now turning to our outlook for fiscal twenty twenty five.

We've been operating in a highly dynamic backdrop for the last few years, and we're expecting the same for the balance of fiscal twenty twenty five. Our outlook assumes a relatively consistent macroeconomic environment but acknowledges the potential for increasing uncertainties related to consumer behavior and global economic and geopolitical conditions. As a result, we continue to take a balanced view with our guidance and remain focused on controlling the controllables. Today, I'll provide a fiscal twenty twenty five outlook that does not include tariffs and then separately quantify the potential impact of trade policy on our profits should current policies remain. Since last quarter's outlook, trade policy has introduced new cost headwinds to margins in the form of tariffs.

Because tariffs remain dynamic, we've not reflected the potential effect in the outlook we provided today. However, we are providing an estimate of our latest view. We remain confident that our strategic priorities are working, as evidenced by another strong quarter. That success underscores our belief that the outlook we provided on our fourth quarter call remains fundamentally intact, excluding the estimated impact of current tariffs. Starting with full year 2025 net sales, we continue to expect net sales to be up 1% to 2% year over year.

Our outlook assumes ongoing strength at Old Navy and Gap, stabilizing performance at Banana Republic, and a longer recovery time line at Athleta. We believe great brands can win in any environment. Moving to gross margin. We continue to expect underlying gross margin to expand slightly year over year, with roughly equal amounts coming from rod leverage and merchandise margin. Turning to SG and A.

We continue to expect SG and A to leverage slightly for the full year. As we discussed on last quarter's call, we're driving continuous improvement in the cost structure of the company as we rigorously drive savings in our core operations through efficiency and effectiveness. Our outlook continues to reflect the approximately $150,000,000 in cost savings and efficiencies we expect to achieve this year through better operations. We remain committed to reinvesting a portion of the $150,000,000 of efficiencies into future growth projects as we pursue the long term success of the company. While we have contemplated whether to delay these strategic investments in the face of trade policy headwinds, between our foundational execution and balance sheet strength, we believe the pursuit of these initiatives remains important to the long term momentum of the company.

Select examples of these initiatives are product to market capabilities that will build localization and speed in addition to foundational capabilities like RFID and AI. A portion of these savings will also offset continued inflation. Finally, for fiscal twenty twenty five, we expect underlying operating income growth of approximately eight to 10% for the full year. Now regarding tariffs, as I mentioned previously, given the dynamic nature of trade policy, our fiscal twenty twenty five outlook does not reflect the potential effect of tariffs. However, based on what we know today, if current tariffs of 30% on most imports from China and 10% on most imports from other countries remain for the balance of the year, we estimate a gross incremental cost of approximately $250,000,000 to $300,000,000 We currently have strategies to mitigate more than half of that amount.

After considering our mitigation strategies, we estimate a remaining net impact of about $100,000,000 to $150,000,000 to fiscal twenty twenty five operating income primarily weighted to the back half of the year. As a global leader with the benefit of scale, we are moving swiftly with our mitigation plans, which include adjustments to our sourcing, manufacturing, and assortments. We remain committed to evaluating the remaining levers we have at our disposal to achieve further mitigation. Importantly, we're taking a long term view as we continue to mitigate these headwinds rather than responding with short term decisions that could compromise the integrity of our strategy. This is an early view, and trade policy remains dynamic, so we will continue to reassess and refine our approach as future developments arise.

We are being even more rigorous in our approach to inventory for the balance of the year. We've further tightened the way we purchase unit inventory for the second half of the year to ensure maximum flexibility for various demand scenarios and to enable us to be more responsive to consumer demand. We continue to expect capital expenditures of $600,000,000 for the year as we utilize our strong balance sheet to invest in the organic opportunities for value creation that we see in our business. Now let me share some color on our outlook for the second quarter of fiscal twenty twenty five. It's important to note that we estimate minimal impact to our Q2 outlook based on currently enacted tariffs.

We expect second quarter net sales to be roughly flat year over year. This contemplates our solid quarter to date performance and reflects a one percentage point impact related to the lapping of the benefit we saw last year from the incremental revenue related to our credit card agreement, which we do not expect to recur this year. We expect second quarter gross margin to be similar to our first quarter gross margin. This outlook reflects the impact from lapping last year's credit card benefit, which is the primary driver of the implied year over year decline. And finally, we are planning for second quarter SG and A to leverage slightly versus last year.

In closing, I'm incredibly proud of the strong first quarter performance, which reflects disciplined execution and underscores the progress we are making. While tariffs have the potential to impose new costs, we remain focused on controlling the controllables and executing our strategic priorities which are driving results. And we remain committed to building on this momentum as we work toward becoming a high performing company that delivers sustainable profitable growth and long term value for our shareholders. With that, we'll open the line for questions.

Thank you. Our first question will come from Alex Stratton from Morgan Stanley.

Thanks so much. Congrats on a nice quarter. I wanted to focus on tariffs here. You said you can mitigate more than half of the impact. And I'm just curious, is there room for that to be bigger both this year and then over time?

It sounds like maybe that's the case given your reinvestment commentary. Thanks a lot.

Thanks, Alex. First of all, thank you for the shout out on the quarter. We're really pleased with the progress and the results. And I'm happy to sort of address the tariff question upfront. What I would say is, first off, Katrina and I will take this, but like any business, we're constantly navigating complexity.

And in this case, it's tariffs. And it's our responsibility to do so without compromising the long term integrity of our strategy, and most importantly, the customer value proposition. So we already have strategies to mitigate over half of the anticipated impact of tariffs. Now this has been done through thoughtful adjustments to sourcing, manufacturing, assortments, and we also remain committed to achieving additional mitigation over time. Now, we've also shared with you that we've been diversifying our sourcing footprint for several years.

China, as an example, used to be one of our top sourcing countries, and we now expect it to be less than 3% by the end of this year. And by the end of twenty twenty six, we're planning for no country to account for more than 25%. So there's a lot more information to unpack, but I'm going to pass it to Katrina to talk about our outlook and the estimated tariff impact.

Great. And thanks, Alex. I mean, our goal, first and foremost, in providing the outlook we provided today was transparency. We were very purposeful in separating the outlook from the estimated tariff impact. We believe that the outlook provides a perspective on the underlying health of the business, which is working, as well as then the estimated impact of current tariffs, which could still change.

I think last night's news is a good example of where we're still trying to see where this lands. And the first half of twenty twenty five is largely unimpacted by current tariffs. There was no impact in Q1 and very minimal impact to Q2. So the estimated tariff impact that we provided today is really primarily weighted to the second half. And much of that will be determined with shipping that occurs late in the second quarter and beyond.

So that's sort of the context to the way we set the outlook. As it relates to the actual tariff impact, if current tariffs of 30% on most imports from China and 10% on most imports from other countries remain for the balance of the year, we have estimated a gross incremental cost of $250,000,000 to $300,000,000 Now, as you note, we have already swiftly in the last few weeks put in place strategies to mitigate more than half of that amount. So considering those mitigation strategies, we have about a remaining net impact of $100,000,000 to $150,000,000 to fiscal twenty twenty five. Now, I think given we'll know more coming out of the July 9 milestone and pending court decisions, we certainly expect to be able to provide more perspective on the remainder of the year on our next call. Meanwhile, we do expect to mitigate the impact over time and plan to use the same levers we've discussed, including adjustments to sourcing manufacturing assortments.

But as Richard said, we're committed to the long term strategy even as we navigate this short term disruption.

The next question is from Adrienne Yih from Barclays.

Good afternoon and congratulations on the quarter and the Gap brand in particular from where I sit. It looked like they were really driving full price selling. So my first question Richard is on the Gap brand. It seems like you are starting to have moments, whether they're the collaborations where you can really drive full price. And then inquire to moments that we still do often see sort of box off or a purchase off.

I know you've talked about kind of maintaining the balance between providing value and then having these kind of full price moments. Can you talk about kind of your success in getting sort of more Gen Z, more millennial and then striking that fine balance? And at what point, what do you need to see to start pulling back more on these sort of like box off promos? Thank you.

So, Adrienne, thank you so much for the call out of the quarter, but in particular the Gap brand, which we collectively are really proud of the progress that we've been making. They've done an incredible job executing with clarity and consistency our brand reinvigoration playbook. And as you note, Q1 comps accelerating to 5% while achieving the eighth consecutive quarter of market share gains is really proving that momentum is building. The strong performance has been fueled by innovation in product, style, product newness, and compelling marketing with a social first approach. Both men's and women's gained share in the quarter, and our brand campaigns and the collaborations, which you mentioned, are also attracting a new generation to Gap.

Now we're doing this while we're also reinforcing the brand to those who have loved us for years. Examples of this, the recent campaign featuring Parker Posey resonated with consumers both all generations. And its unique creative format is the great example of how we're bridging the generation gap. The collaborations that we've been working on, like Harlem Fashion Row, DOWEN, the recent launch of Gap Studio, which generated real excitement and buzz to the brand, but it's also showing that we can drive strong, full price sell through, which is demonstrating the brand's pricing power. It's a very exciting moment for the brand as we get more and more traction and momentum, And with the strength of our playbook in action and the power of the brand is performing, we really do believe that the Gap brand is well positioned to continue the momentum.

Great. And Katrina, my follow-up is on the mitigation practices that are already in play. At that number, the gross number, if you were to mitigate that, it's seemingly implying a low- to mid single digit price increase if you were just using that. I didn't hear you talk about price increases as one of the things that you were that you had already were undergoing. And certainly, you wouldn't do that until later in the year.

So I'm wondering where pricing falls into the mitigation strategies. Is it in there already? Thank you.

So, Adrienne, let me just take that, and if Katrina wants to embellish. But we're approaching our pricing strategy as we always do. We consider all the various inputs, while maintaining the overall value proposition for our consumers. And based on what we know today, we do not expect there to be meaningful price impacts to our consumer. We really do believe that strong brands can win in any market.

And as we look ahead, we see the potential for further market share opportunity. Now we're going to continue watching trade developments, the consumer as we do very closely, and the competition closely, but at this particular time, we're approaching our pricing strategy as we always do.

And gentlemen, as a reminder, please limit your questions to one per participant. Up next is Matthew Boss, JPMorgan.

Great. Thanks. So Richard, at the Gap brand, could you speak to new customer acquisition as you comp the comp and drivers of the consistency that you're now seeing at Old Navy? Or just any change in momentum at either brand so far in May? And then Katrina, I guess excluding tariffs, is this year's outlook for 8% to 10% operating income growth on 1% to 2% sales?

Is that a reasonable multiyear model algorithm? And lastly, is there any reason multiyear that you can't mitigate the full tariff impact through sourcing diversification?

So Matthew, thank you. We'll tackle that question as a team. But I think the first part of that, as I mentioned, we really are bridging the generation gap, particularly with the Gap brand. Our recent campaigns are designed to literally attract all generations through music, big ideas, and the amplification of those through really what we'll call fashion tainment marketing. The collaborations that we've been driving have real proof points of that.

New customer acquisition is increasing. We also saw that through the collabs, there's a halo effect, and the core brand is driving at least 25% of that basket. So the collabs, while driving new traffic and new volume, 25% of that basket includes core product. So we have great proof points, both qualitatively and quantitatively, that our strategy is really working. Now on Old Navy, which is important to talk a little bit about, we delivered really strong comps for the quarter, 3% increases.

It's also our ninth consecutive quarter of market share gains. Again, proving the consistency and the deliverables of the execution are really resonating. We called out categories like active and denim, where we've been very intentional about pursuing a leadership position, and it's showing up in the results. Our active business continues to grow quarter after quarter. We're the number five player in the category, and we're continuing to gain share as recent as this quarter.

You might have noticed we launched a new segment called Studio Smooth. The collection has outperformed our expectations, which is really marking another step forward in the category. We, on Tuesday, introduced our new campaign Old Navy New Moves. It's a great, exciting campaign that supports the activewear strategy. It's culturally relevant marketing that's really speaking to the brand playbook, and it's a clear example of how we're accelerating Old Navy's adoption of the new brand playbook, taking big product ideas, amplifying them with storytelling, and ultimately connecting this to the consumer.

Generation gap, for sure. We've got Lindsay Lohan, Dylan Efron, Quinlan Blackwell, and even Charo in the campaign. It just launched Tuesday, and it's also getting great traction. It's also important to note, denim was a really another big category standout for us. We've gained share in that category as we secured our position as the fourth largest adult denim brand in The US.

We also saw positive response to our occasion dress collection, which had really strong full price sell through, serving as a great example of pricing power. When you have great product, great style and great value, customers take notice. So look, these are all foundational elements that we've established in our portfolio and in particular Old Navy, underpinning the brand's performance and it's giving us real confidence that we will continue to deliver in 2025. And maybe I'll turn it over to Katrina to answer the second part of the question.

Yeah. So, Matt, I think it is fair to say that our longer term economic model is for us to deliver somewhere in that low to mid single digit sales growth range with then operating margin that grows in the high single digit range. And then when you combine that with return of cash to shareholders, you get a very nice top tier TSR. And so that algorithm, I think, is one that we look to repeat over time. Any reason over multiyear we can't impact mitigate?

No, I don't think so. I mean, I think there's a few things. Momentum in the business is a great way to start to offset, and we're working on that through our reinvigoration. We continue to stay very focused on efficiencies within the cost structure of the company. And so we've got a track record of that.

We'll stay focused on that. And then I think lastly, I spoke to some of the investments that we're staying committed to because they are important for the momentum going forward. Many of those like AI, RFID, and some of the product to market capabilities are intended to help shore up margins over time. And so that's part of the reason why we remain committed to those in the near term so that we can continue to make progress over the long.

Up next, we'll hear from Lorraine Hutchinson, Bank of America.

Thank you. Good afternoon. Can you talk about the puts and takes driving the flat merchandise margin this quarter? And then which brands or strategies lead to the upside in the remainder of the year to hit your guidance for merch margin?

So Lorraine, I think on merchandise margins, for Q1, we were very proud that we were able to expand merchandise margins by 60 basis points. That was underlying merch margins of relatively flat, which was holding on to many of the gains we got over the last few years With the margin expansion really coming from Rod, our brands are really resonating well. And that's really allowing us to gain relevance and have market share gains as well as giving us pricing power in the market. As we look to Q2, we have guided to margins to be similar to Q1. That does imply a year over year decline.

That is really from lapping last year's credit card benefit. If you remember, that was a primary driver of some of the increases last year. And so as we lap that, that does drive a decline year over year. The underlying merchandise margins are intended to be relatively flat. And then as we look out to the full year, we continue to expect underlying gross margins to expand slightly with roughly equal amounts coming from rod leverage and merchandise margin expansion.

The next question will come from Dana Telsey, Telsey Group.

Hi. Good afternoon, everyone. As you think about the solid progress that you've made in both Gap and Old Navy on the product side and also the customer appeal side, how are you thinking about Banana Republic and Athleta? And what happens with anything different with tariffs with them versus the other brands and attracting new customers? And lastly, just on store and online sales, what did you see by brand traffic in each of them?

Does it differ at all? And how you're seeing the consumer convert? Thank you.

Dana, thanks for the question. And I'm happy to talk about Banana Republic and Athleta. I'm really encouraged by the ongoing progress that we've made in Banana Republic. We've also talked about it being the focus on reestablishing the brand by fixing fundamentals. And we see some great new proof points emerging, delivering a flat comp in the quarter.

We're leaning much more heavily into classics, much more precise assortments. Fit is resonating as we work to rebuild that trust with our customer. Men's continued to perform well, and we've been pleased by the improving performance in women's. We've been focused on greater alignment in design and merchandising across both genders, which we believe will cultivate a broader appeal over time. And the work the team has done to improve women's and strategically redeploy our marketing to a much more culturally relevant storytelling brand is really resonating.

I would call out one of the highlights from the quarter was the White Lotus collaboration. I mean, was a real testament to the clarity of our positioning as a modern explorer brand. One that embodies, obviously the spirit of exploration, and it was inspired by the world of White Lotus, but still distinctly Banana Republic. So I think it's a great example of our playbook in action. We're gonna continue to strengthen the foundation at Banana, and with each passing quarter, we're seeing clearer signs of brand progress, customer engagement, and it's giving us confidence that the brand is indeed on the right path forward.

Now Athleta, important to say, has a really valuable place in both our portfolio and in the industry. And we've been resetting the brand to be more effective in competing in the marketplace. We do expect this year to continue to be choppy as we continue to focus on fixing the fundamentals. And this has been reflected in the outlook that we provided today. As I've said, you know, we made progress with the brand in 2024.

This was primarily through a lot of discipline and rigor, which is actually showing up in better profitability. What we need to do more work on to break through is get our product and marketing to get back to top line growth. Now we're continuing to work through what we shared last quarter, which was an over rotation towards a new, more trend forward customer. And by the way, we've been successful in bringing new customers into the brand, and we did also see new customers in the quarter, but we still don't have enough compelling products to appeal to our large existing customer base, and that's showing up in the brand's performance. So we're investing in design talent, we're working to find the right balance across the assortment, it will take some time, We do have work to do, but we're absolutely committed to taking the necessary steps and resetting the brand.

Now, the next part of your question was channel strategy. So let me just talk a little bit about that. First of all, the goal is to always be where our consumers are, where they are and where they're going, whether that's in our stores or through a digital dialogue. We've been really focused on cultivating the best experience that we can provide across every touch point. It is a work in progress, but we're making progress.

This quarter we saw store sales flat in the first quarter, and our online business grew 6%. It represents about 39% of our total net sales, but it's also demonstrating the strength of our digital business. Today, Gap Inc. Is the number one branded apparel e commerce business in The U. S.

We've got nearly 1,500,000,000 visitors in the last twelve months, and it represents an extraordinary continued growth opportunity for us. We're obviously going to continue to focus on advancing and expanding our e commerce capabilities, and create more compelling customer experiences, but not at the expense of our stores. We love our stores. Stores are a really important way for customers to experience our brands. They bring our product, our storytelling, our service to life in ways that digital can't.

Gap (GAP) Q1 2026 Earnings Call Transcript

Company Participants