Gap Q1 Earnings Prep: Fall Into the (EPS) Gap
GAP, the storied San Francisco grunge-rock clothier, today houses four apparel brands: Old Navy, Gap, Banana Republic, and Athleta. Its story over the past decade is one of stagnation, and so CEO Richard Dickson has been staging a two-year turnaround to return it to its former heyday as pop-culture tastemaker.
To-date, his eight consecutive quarters of positive comparable sales suggest progress. Athleta is the exception, where comps went +5%, +5%, then -8% and -11% in the four most recent quarters. Thursday, May 28 brings the Q1 fiscal 2026 report, and from this we will get a read out both on Gap’s trajectory and, just as important for many watchers, indicators of the overall macro environment.
The composition of fiscal 2025’s $15.37B net sales show the role of each brand to GAP. More than half of their net sales, 56%, comes from Old Navy $8.66B, the value engine.
Gap’s eponymous brand’s $3.50B contributes 23%, while Banana Republic $1.92B is 12% and Athleta $1.22B is 8%. Margins aren’t disclosed by brand, but Old Navy runs lower margin on bigger volume while Banana Republic and Athleta sit at premium prices. Athleta’s revenue has fallen from a $1.48B peak in fiscal 2022 to $1.22B, a 17.6% drop in three years, while Old Navy grew 5% over the same window and Banana Republic gave back 9%.
Management frames the turnaround strategy in the latest 10-K as an effort to fix fundamentals first while “thoughtfully seeding growth accelerators that will scale over time.” The latter includes beauty, accessories, the Fashiontainment platform (Gap’s trademarked name for its influencer/creator marketing program plus celebrity-tie-up campaigns -- yikes). Operationally, the playbook does three things at once: 1) Holds Old Navy as the value brand; 2) Reprices Gap brand upward, e.g. by pulling back on discounting for two consecutive quarters while accelerating comps from +3%/+3% in fiscal 2024 to +5% in Q1 fiscal 2025 and +7% in Q3; and 3) Bringing in new leadership for the two broken brands, first with Athleta in the second half of fiscal 2025, and then Banana Republic with new CEO Donald Kohler on May 19, 2026.
Fiscal 2025 came in at what Dickson called “one of our highest gross margins in the last 25 years,” suggesting this strategy is a good one. Heading into Thursday, here’s what we’re watching:
Old Navy Comps. Old Navy comps ran +3% in Q1 fiscal 2025, accelerated to
+6% in Q3, and held at +3% in Q4. Macro cuts both ways here: wage softness can hurt the lower-income core or help via trade-down from higher-income shoppers. We will look for Q1 comp at +3% or better. If it is above +5%, that suggests the trade-down narrative is winning, while below +2% says volume contraction is.
Gap Brand Discounting Discipline. Gap brand Q4 comp was +7% on top of +7% the prior year. Management called out elasticity as they’d cut promotional discounts, increased average price per item, and saw unit volume hold, showing that they have pricing power. Gap brand sits in the middle of the income curve, so it may be the victim if we see trade-down via Old Navy. Strategic success would mean another quarter of disciplined discounting with specific revenue mentions of the fragrance and accessory launches. Strategic failure would show up as promotional intensity creeping back up.
Athleta Slowing the Slide. Revenue stepped down from $329M in Q1 fiscal 2024 to $308M in Q1 fiscal 2025 and $257M in Q3. New leadership is in place, and Dickson called the brand a “work in progress” that is “re-architecting the assortment.” A Q1 comp better than the -8% year-ago base would suggest the decline is moderating. Worse than the -11% Q3 trough would mean the slide is still accelerating, and the rebuild is behind plan.
A $313M Settlement Footnote. Q1 reported numbers include a $313 million net legal-settlement gain due to credit card interchange litigation and a $50 million charitable contribution. Together these add roughly $0.51 of one-time items and bring reported EPS to about $0.90, a 76% jump from last year’s $0.51 that will dominate wire headlines. The adjusted (operating) figure strips those items out: consensus is around $0.39, which is a 24% year-on-year decline driven by tariff drag. The settlement is unrelated to apparel performance but will muddle the operating read unless stripped out.
The Tariff Math. Management guided Q1 gross margin down 150 to 200 bps off the 41.8% Q1 fiscal 2025 base, with 200 bps attributed to net tariffs, implying Q1 GM of roughly 39.8% to 40.3%. Ending inventory of $2.21B was up 6.8% YoY against 1.9% sales growth, partly because tariff costs got capitalized into inventory. Listen for Q1 GM at or above 39.8-40.3%, sourcing-diversification language (Vietnam, Indonesia), and whether the Supreme Court’s IEEPA ruling and the pending refund question reshape the FY26 plan.
Consensus is $3.52 billion in revenue (+2%) and $0.39 adjusted EPS, with reported EPS near $0.90. The stock trades near $23, off the $30.69 consensus target after gapping from $27 to $24 on March 6 when the fiscal 2026 outlook landed heavier on tariffs than expected. The fiscal 2026 guide is 2-3% sales growth, gross margin flat to up slightly versus 40.8%, adjusted EPS of $2.20 to $2.35 (vs. $2.13), and capex of about $650 million, up 38% from $470 million.
The most important comments on Thursday will be on Athleta and whether the full-year GM guide holds at 200 bps of Q1 tariff drag. If Athleta’s comp improves sequentially and Q1 GM lands at or above 40.3%, the story stays on the rails. Meanwhile, if both go the other way, the fiscal 2026 EPS guide would be at risk.
All data via Revelata’s deepKPI from Gap Inc.’s 10-K, latest 10-Q, and quarterly 8-K press releases, with additional context from analyst reporting and market data.
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