Gap Earnings: Key Brands Showing Strength Despite Tariff Threat; Shares Attractive

Key Morningstar Metrics for Gap

• Fair Value Estimate: $28
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Gap’s Earnings

Gap GAP had 2% same-store sales growth in first quarter 2025, as Old Navy achieved a 3% increase. The firm’s gross and operating margins rose 60 and 140 basis points, respectively, to 41.8% and 7.5%. However, tariff concerns caused shares to fall 15% on May 29 post-market trading.

Why it matters: Gap’s shares had surged more than 50% since the tariff announcement of April 2, as investors focused on the firm’s ongoing turnaround rather than the risk.

• Efforts to improve merchandising, store operations, and marketing have improved trends at Old Navy (58% of sales) and Gap’s namesake brand (21%). Old Navy’s comparable sales beat our 2% estimate, and Gap Global’s 5% mark was well above our 1% forecast.
• Gap’s operating margin outperformed our estimate by 110 basis points, and it held to its full-year outlook for 1%-2% sales growth and 8%-10% operating profit growth. However, this guidance does not incorporate possible tariff expenses.

The bottom line: We do not expect to make any material change to our $28 per share fair value estimate and think tariff concerns may be overblown. In our view, no-moat Gap is making the right investments to generate consistent sales growth and operating margins of 7.5%-8%.

• At the current proposed tariff rates (30% China, 10% most other countries), Gap estimates the negative effect on 2025 operating income after mitigation efforts would be $100 million-$150 million, or about 10% of its expected operating profit for the year.
• Even so, as our valuation is based on a 10-year discounted cash flow model, a temporary reduction in operating profit has minimal effect.

Between the lines: Banana Republic (12% of sales) and Athleta (9%) had flat and negative 8% same-store sales, respectively, versus our estimates of negative 2% and negative 5%.

• Despite its recent problems, we think Athleta has strong potential in the attractive women’s athleisure category. We believe new merchandise will allow it to return to midsingle-digit sales growth by 2026.