Gap shares jumped 12.9% on Friday after the apparel group paired a higher annual profit forecast with a leadership change at Old Navy, giving investors fresh reasons to believe its turnaround can continue. The market’s enthusiasm, however, rested less on uniformly strong sales than on management’s ability to improve profitability while confronting a widening performance gap inside the portfolio.
For the second quarter ended August 1, Gap Inc. reported net sales of about $3.7 billion, down 2% from a year earlier, while companywide comparable sales declined 1%. Adjusted earnings were 52 cents a share, ahead of the 48 cents expected by analysts surveyed by LSEG. The result showed that higher average unit retail and margin control can support earnings even when consolidated demand is not expanding.
The brand-level figures explain both the rally and the remaining risk. Comparable sales at the Gap banner rose 10%, extending a run of growth and lifting the brand’s quarterly net sales 9% to $844 million. Banana Republic comparable sales increased 3%. By contrast, Old Navy comparable sales fell 4%, their first decline in 12 quarters, and net sales at the chain dropped 4% to $2.1 billion. Athleta remained weaker still, with comparable sales and net sales both down 12%.
That divergence matters because Old Navy is Gap Inc.’s biggest business. A revival at the namesake chain can improve the group’s mix and brand credibility, but it cannot indefinitely compensate for declining sales at a banner more than twice its size by quarterly revenue. Gap said pressure in Old Navy’s women’s seasonal assortment and an unexpected traffic slowdown hurt the quarter. Higher promotional activity at Old Navy also partly offset merchandise-margin strength elsewhere.
The company’s response was to appoint Michael Francis as Old Navy’s president and chief executive, effective November 2. He will succeed Haio Barbeito, who is moving into an advisory role. Francis joined the company in March as Old Navy’s chief customer officer and head of shared marketing services. His four decades in consumer businesses include senior roles at Target, DreamWorks Animation and JCPenney, as well as advisory work for Walmart.
The appointment makes the next phase of the turnaround more operationally specific. Francis is charged with improving storytelling, the customer experience and Old Navy’s connection with families. Those priorities sound like marketing, but the financial test will be concrete: better traffic without heavier discounting, more productive seasonal assortments and a return to comparable-sales growth at a chain that generated $2.1 billion in the quarter.
Gap raised its adjusted full-year earnings forecast to $2.35 to $2.45 a share from $2.30 to $2.40 and lifted its adjusted operating-margin range to 7.4% to 7.6%. At the same time, it narrowed expected net sales growth to 1% to 1.5% from 1% to 2%. That combination is encouraging for near-term earnings but cautious on demand. It implies that execution, pricing and expense control remain more dependable than broad-based revenue acceleration.
The reported figures also require care because tariff recoveries created a large accounting benefit. Gap recorded a $417 million reduction to cost of goods sold related to the net recovery of tariffs imposed under the International Emergency Economic Powers Act. Excluding that benefit, adjusted gross margin was 41.4%, up 20 basis points, while adjusted operating margin was 7.1%. The company’s adjusted outlook excludes the refunds, making those measures more useful for judging the underlying business.
Investors are therefore rewarding evidence that Gap can protect earnings while it repairs its largest brand. The 12.9% share-price gain is a vote of confidence in management’s discipline and in Francis’s mandate, not proof that the portfolio has already been fixed. The next few quarters will show whether the Gap banner’s cultural momentum can be translated into a repeatable playbook for Old Navy. Until then, the company’s turnaround remains credible, but uneven.