TLDR
- Gap stock fell 18% despite beating earnings and sales estimates
- Management warned of a $100-$150 million tariff-related cost hit
- Flat Q2 sales guidance and only 1-2% full-year growth expected
- Athleta and Banana Republic brands continue to struggle
- Valuation remains attractive compared to peers
Gap stock (NYSE: GAP) was trading at $22.82, down 18.37% by midday Friday, after the company reported its fiscal Q1 2025 results.
Despite beating both earnings and sales estimates, investors focused on the company’s warning about $100-$150 million in tariff-related costs, a muted Q2 forecast, and ongoing brand challenges.
Strong Q1 Results but Cautious Guidance
Gap reported Q1 earnings per share of $0.51, surpassing the Zacks Consensus Estimate of $0.44 and up 24.4% year over year. Revenue reached $3.5 billion, exceeding expectations and rising 2% from the previous year. Comparable sales increased 2%, with Old Navy and Gap brands showing 3% and 5% growth, respectively. However, Banana Republic’s comps were flat, and Athleta saw an 8% decline.
Despite the strong quarterly performance, management projected flat year-over-year sales for Q2 and maintained a modest 1-2% full-year growth outlook. Investors appeared disappointed by the conservative guidance, especially after recent momentum.
Tariff Concerns Take Center Stage
The most alarming news came from management’s disclosure that tariffs could create gross incremental costs of $250-$300 million, with a net operating income impact of $100-$150 million in fiscal 2025.
Gap: “If these tariff rates remain, they could result in a gross estimated incremental cost of ~$250 million to $300 million.”$GAP: -18% AH pic.twitter.com/agpYuh8Fi7
— The Transcript (@TheTranscript_) May 29, 2025
CEO Richard Dickson emphasized that the company has strategies to mitigate at least half the tariff effects, aiming to avoid price increases for consumers. Still, the expected margin compression and earnings pressure spooked investors, leading to the steep sell-off.
Brand Challenges Remain
Athleta and Banana Republic continue to weigh on overall performance. Athleta’s comparable sales dropped 8% in Q1, as the brand struggles with product and customer alignment. Banana Republic saw a 3% net sales decline with flat comps, reflecting the slow pace of its recovery. Despite progress in core brands like Old Navy and Gap, these underperforming segments raise concerns about Gap’s ability to fully capitalize on its turnaround efforts.
Valuation and Performance Context
Gap’s stock has performed strongly over the past three months, gaining 30.9%, well above the Retail-Apparel and Shoes industry’s 4.9% rise and the S&P 500’s 0.6% increase. Over the past year, GAP shares are up 4.34%, with a three-year return of 125.7% and a five-year return of 204.3%.
From a valuation perspective, Gap trades at a forward 12-month P/E of 11.79x, below the industry average of 18.27x and the S&P 500’s 21.66x. Its forward P/S ratio of 0.68x is also substantially lower. This suggests the stock offers potential value, though near-term headwinds temper the bullish case.
Earnings Date
Gap’s next earnings report is scheduled between August 27, 2025, and September 1, 2025.
