Gap Comparable Sales Turn Down 1% After Ninth Straight Gain
The apparel company posted $3.7 billion of second-quarter net sales and raised its adjusted full-year earnings outlook to about $2.35 to $2.45 a share.
Gap Inc. (GAP), the largest specialty apparel company in the U.S., reported comparable sales down 1% in the second quarter ended August 1, 2026, reversing a 2% increase in the first quarter that had marked a ninth consecutive quarter of positive comps. Net sales were $3.7 billion, down 2% from a year earlier, after a 1% year-over-year increase in the prior quarter.
President and Chief Executive Officer Richard Dickson said top-line results were modestly below expectations and that operational and financial rigor contributed to gross margin strength that let the company exceed profit expectations. He said the company has work to do at Old Navy and is taking targeted actions already driving improved results.
Reported gross margin was 52.8%, up 1,160 basis points versus last year, including a 1,140-basis-point net benefit from the expected recovery of tariffs imposed under the International Emergency Economic Powers Act. Adjusted gross margin excluding that benefit was 41.4%, up 20 basis points versus last year, after 40.5% in the first quarter, which had declined 130 basis points versus last year. The company recorded a $417 million adjustment to cost of goods sold related to the net IEEPA tariff recovery, receiving $95 million of refunds and $5 million of related interest income in the quarter, with remaining refunds expected in the third quarter.
Operating income was $676 million and operating margin was 18.5%. Adjusted operating income was $259 million and adjusted operating margin was 7.1%, excluding the net IEEPA tariff recovery, versus 5.2% in the first quarter, which had excluded a $313 million legal-settlement gain and a $50 million charitable donation. Net income was $501 million and diluted earnings per share were $1.38. Adjusted net income was $190 million and adjusted diluted earnings per share were $0.52, excluding the net IEEPA tariff recovery and related interest income, versus $0.38 in the first quarter.
Old Navy, the largest brand, posted net sales of $2.1 billion, down 4% compared with last year, with comparable sales down 4%. The decline reflected expected pressure in the women’s seasonal assortment and an unanticipated slowdown in traffic. Gap brand net sales were $844 million, up 9%, with comparable sales up 10%. Dickson said the brand’s focus on big ideas and culturally relevant storytelling continued to drive performance in denim, fleece, and kids and baby. Banana Republic net sales were $478 million, up 1%, with comparable sales up 3%. Athleta net sales were $264 million, down 12%, with comparable sales down 12%. Athleta remains focused on disciplined execution to rebuild the brand profitably.
Store sales decreased 3% compared with last year, after a 3% increase in the first quarter. Online sales decreased 1% and represented 35% of total net sales, after a 2% online decline and a 38% online mix in the first quarter. The company ended the quarter with nearly 3,500 store locations in about 35 countries, of which 2,471 were company-operated.
The company narrowed its full-year net sales outlook to up 1% to 1.5% from up 1% to 2%, now assuming Old Navy comparable sales of flat to down 1% versus a prior range of flat to up 1%. Gap brand comps are now expected to grow in the high-single- to low-double-digit range, compared with prior expectations of up to high-single digits, while expectations for the balance of the portfolio remain unchanged. Adjusted full-year diluted earnings per share are now expected at approximately $2.35 to $2.45, from approximately $2.30 to $2.40. Reported full-year diluted earnings per share are now expected at approximately $3.77 to $3.87. Adjusted operating margin is now expected at about 7.4% to 7.6%, from about 7.3% to 7.5%. Adjusted gross margin is now expected to be up slightly year-over-year, from flat to up slightly.
For the third quarter of fiscal 2026, the company expects net sales up 1.5% to 2.5% year-over-year and gross margin up about 25 to 75 basis points. The adjusted outlook excludes the impact of IEEPA refunds. Following a July Section 301 announcement, the company updated tariff rate assumptions to incorporate a roughly 10% incremental rate from July 24, 2026, through the end of August, versus a prior assumption of an incremental high-teens rate. That update is expected to provide approximately $15 million of net tariff relief to full-year gross profit and operating income, or about 10 basis points of benefit to full-year gross margin and operating margin, concentrated in the fourth quarter.
Cash, cash equivalents and short-term investments were $2.5 billion, up 2% from the prior year. Ending inventory of $2.3 billion was flat compared with last year. Year-to-date net cash from operating activities was $550 million and free cash flow was $261 million. Capital expenditures were $289 million year-to-date.
The company completed a $200 million accelerated share repurchase, receiving an additional 1.4 million shares in May after 6.9 million in the first quarter, and repurchased 9.3 million shares in the open market for $200 million in the second quarter. It returned $262 million in the quarter and $726 million year-to-date through share repurchases and dividends. It paid $62 million in dividends of $0.175 a share, up 6% from the prior year, and approved a third-quarter dividend of $0.175 a share. $399 million remained under its existing share repurchase authorization.
The company separately announced Michael Francis as Old Navy’s next President and CEO, succeeding Haio Barbeito.