Gap raises profit forecast as Q2 earnings beat, shares surge 11%

Gap Inc. reported Q2 adjusted EPS of $0.52, beating the $0.48 consensus, and raised its full-year profit forecast, sending shares up over 11 percent.

The company narrowed its net-sales growth outlook to 1 percent to 1.5 percent while lifting adjusted EPS guidance to $2.35-$2.45, supported by a lower expected share count and reduced net interest expense, management said.

Net sales fell 2 percent to $3.651 billion from $3.725 billion a year earlier, with comparable sales down 1 percent. The Gap brand delivered 10 percent comparable-sales growth, while Old Navy fell 4 percent and Athleta dropped 12 percent. Adjusted gross margin expanded 20 basis points to 41.4 percent.

The earnings beat and guidance raise show management expects continued momentum at the Gap brand despite weakness at Old Navy and Athleta. Investors will watch whether Old Navy traffic improves in the back half and whether Athleta's contraction moderates, with Q3 sales expected to rise 1.5 percent to 2.5 percent.

GAAP diluted EPS surged to $1.38 from $0.57, driven by a $417 million tariff-recovery adjustment to cost of goods sold. Excluding that nonrecurring item, adjusted operating income fell about 11 percent to $259 million, with adjusted operating margin at 7.1 percent, down 70 basis points. Merchandise margin excluding the recovery improved 80 basis points, helped by tariff mitigation and higher average unit retail across all brands.

Old Navy's 4 percent sales decline reflected pressure in women's seasonal assortments and an unanticipated slowdown in customer traffic, while higher promotional activity partially offset merchandise-margin gains. The company named Michael Francis as Old Navy CEO to address the brand's challenges. Banana Republic posted modest growth of 1 percent, with comparable sales up 3 percent.

Gap ended the quarter with $2.5 billion in cash and equivalents, up 2 percent year over year, and inventory was essentially flat at $2.297 billion. The company returned $262 million through repurchases and dividends during the quarter. Operating cash flow for the first 26 weeks was $550 million, up from $308 million a year earlier.

The guidance raise suggests management expects the Gap brand's momentum to offset continued pressure at Old Navy and Athleta. The company's next key event is the Q3 earnings report, with sales expected to grow 1.5 percent to 2.5 percent and gross margin to expand 25 to 75 basis points. The company also reduced its assumed incremental tariff rate for late July through August to roughly 10 percent from high-teens, providing approximately $15 million of full-year gross-profit relief.

This article is for informational purposes only and does not constitute investment advice.