Gap shares collapse after quarterly report. Is the recovery in doubt again?

Shares of Gap, which owns Old Navy, Banana Republic and Athleta in addition to its namesake brand, collapsed nearly 14% after its quarterly report. The retailer's comparable sales fell short of forecasts, in addition it said it expects margins to shrink this year, a sign that new import duties are slowing the company's recovery. As it moves toward a turnaround, Wall Street is expecting better results from it, and it's getting harder to meet expectations, CNBC explains .

Shares of apparel retailer Gap plummeted nearly 14% after it beat market expectations on earnings when it reported last quarter, but comparable sales fell short of the consensus forecast, CNBC points out .

Adjusted earnings per share for the second quarter of fiscal 2025, which ended Aug. 2, were 57 cents, compared with Wall Street estimates of 55 cents. Meanwhile, the retailer's key metric - comparable sales - rose 1%, while analysts had hoped for an immediate 2% increase. The weak result was the result of poor sales for sportswear brand Athleta, which fell 9% in the latest quarter versus the same period a year ago. As a result, Gap's total revenue came in slightly below forecasts: $3.72 billion versus $3.73 billion. It was almost flat year-over-year.

In addition, the company warned that its profitability in the coming quarters will be affected by import duties, which could lead to higher prices for already inflation-weary consumers. Gap expects its annual operating margin to be between 6.7% and 7%, up from 7.4% in the previous fiscal year. The retailer estimated the negative effect of U.S. trade policy at about one percentage point, CNBC noted.

When Gap reported financial results in May, it said the duties would cost it $100 million to $150 million; now it's talking about $150 million to $175 million, Chief Financial Officer Katrina O'Connell said in an interview, her estimate cited by Bloomberg. The company is working to mitigate the impact, including reducing its reliance on purchases from China and using more U.S.-grown cotton.

For the current quarter, Gap expects sales growth of 1.5-2.5%, while the market was expecting 2%, according to LSEG. The retailer kept its full-year forecast at 1-2%, which is roughly in line with consensus.

Gap is trying to revitalize the business under CEO Richard Dixon, who took over just over two years ago. The company is in a very different position now than it was then: it is showing steady revenue growth, Barron's recalls . The company has beaten analysts' sales forecasts in seven of the last eight quarters, the publication points out. It has $2.2 billion in cash reserves, and its brands are back at the center of the cultural agenda. However, their progress is different, with Banana Republic and Athleta recovering more slowly, Bloomberg notes.

Athleta CEO Chris Blakeslee stepped down in July and was replaced by Maggie Gauger, who spent 20 years at Nike and until recently ran the company's North American women's apparel business. She became the brand's third CEO in the past two years, CNBC calculated.

"We can all recognize that just a couple of years ago, Gap was a clothing retailer that was overly discount-oriented and didn't offer consumers a compelling concept from a merchandising perspective. Today, it's a pop culture brand that tells great stories, launches strong initiatives and arguably shapes culture through programs, products and marketing campaigns," Dixon said. - This is what our strategy looks like when it works right."

Gap recently launched a "Better in Denim" campaign with the band Katseye and singer Kelis' hit "Milkshake." According to Dixon, it brought in 400 million views and became No. 1 in TikTok searches. Against the backdrop of Levi's collaboration with Beyoncé, and American Eagle with Sidney Sweeney and Taylor Swift's fiancé, soccer player Travis Kelsey - the campaign reflects Gap's efforts to remain competitive in the key jeans category, CNBC explains.

After a sharp reaction to the report, Gap's shares recovered most of their losses and were trading down less than 1% at the time of this text's release. Since the beginning of the year, the company's value has fallen 8.3%, while over the last three months it has lost almost a quarter of its capitalization.

Wall Street analysts' attitudes toward the stock are subdued, MarketWatch shows . It has 12 Hold ratings, equivalent to advice to hold the stock in a portfolio, and eight buy recommendations (Buy and Overweight). By comparison, a month ago, cautious analysts and optimists were evenly split: ten each. The consensus target price for Gap shares implies a potential upside of 14% over 12 months.

This article was AI-translated and verified by a human editor