Gap Inc. delivered a stronger-than-expected profit performance in the second quarter of fiscal 2026, helped significantly by the recovery of US tariff-related costs, even as overall sales declined.
For the quarter ended August 1, the US apparel group recorded net sales of $3.65 billion, down 2% from $3.73 billion a year earlier. Comparable sales declined 1%, reflecting weaker performances at Old Navy and Athleta, although the Gap brand continued to show strong momentum.
Gap’s reported gross margin jumped to 52.8%, compared with the previous year, largely because of the recognition of tariff refunds connected with the US International Emergency Economic Powers Act. The company recorded a $417 million adjustment to cost of goods sold related to the net tariff recovery during the quarter.
After excluding the tariff benefit, adjusted gross margin stood at 41.4%, representing a 20-basis-point improvement year on year. Adjusted operating income reached $259 million, producing an adjusted operating margin of 7.1%.
Reported operating income rose substantially to $676 million from $292 million in the corresponding period last year. Net income more than doubled to $501 million, compared with $216 million previously, while diluted earnings per share increased to $1.38 from $0.57.
The tariff recovery provided a significant boost to these reported figures. Gap received $95 million in tariff refunds and $5 million in related interest income during the quarter, with additional refunds and interest expected in the following quarter.
Mixed performance across brands
Performance varied considerably across Gap Inc.’s portfolio. Gap delivered the strongest result, with quarterly sales increasing 9% to $844 million and comparable sales rising 10%. Denim, fleece and kids and baby products were among the key growth areas.
Old Navy remained under pressure, with sales falling 4% to $2.06 billion and comparable sales also declining 4%. Athleta reported an even sharper 12% drop in both sales and comparable sales, while Banana Republic posted modest growth, with sales up 1% and comparable sales increasing 3%.
Online sales slipped 1% and represented 35% of total revenue, while store sales declined 3%. Gap ended the quarter with nearly 3,500 stores across around 35 countries.
Gap updates fiscal 2026 outlook
The company raised its full-year earnings outlook while maintaining a cautious view of the consumer and wider economic environment. Gap now expects reported diluted earnings per share of approximately $3.77-$3.87 for fiscal 2026.
The company also adjusted its expectations for individual brands, forecasting high-single-digit to low-double-digit comparable sales growth for Gap, while expecting Old Navy comparable sales to range from flat to down 1%.
The results highlight a mixed picture for Gap Inc. While the Gap Q2 profit performance benefited heavily from tariff recovery, underlying profitability also improved modestly after adjusting for the one-off benefit. The company’s next challenge will be converting stronger margins and the Gap brand’s momentum into sustained sales growth as tariff uncertainty and uneven consumer demand continue.