The quarter cleared the market’s low profit bar, despite a sales miss. Published consensus was roughly $0.48 for adjusted EPS and $3.69 billion of revenue; Gap delivered adjusted EPS of $0.52 but sales of $3.651 billion. The company itself characterized the pattern as top-line results below expectations but profit above them. 〔0〕
| Metric | Q2 FY26 | Q2 FY25 / expectation | Read |
|---|---|---|---|
| Net sales | $3.651B | $3.725B last year; ~$3.69B consensus | Slight miss (Financial Statements; external consensus) |
| Adjusted diluted EPS | $0.52 | $0.57 last year; ~$0.48 consensus | Beat (Adjusted Metrics) |
| Adjusted gross margin | 41.4% | — | Underlying margin held up after excluding tariff refunds (Adjusted Metrics) |
| Reported diluted EPS | $1.38 | $0.57 last year | Distorted by tariff refund recovery (Income Statement; Adjusted Metrics) |
| FY26 adjusted EPS outlook | $2.35–$2.45 | Prior $2.30–$2.40 | Raised (FY26 Outlook) |
| FY26 net sales outlook | Up 1%–1.5% | Prior up 1%–2% | Narrowed lower (FY26 Outlook) |
Margin control, not demand, drove the beat. Reported gross margin reached 52.8%, but that included a $417 million tariff-refund adjustment; excluding it, adjusted gross margin was 41.4% and adjusted operating income was $259 million. The underlying merchandise margin still expanded 80 basis points, showing real cost and mix improvement, but the earnings outperformance was helped by disciplined expenses and lower share count rather than broad-based sales acceleration.
Old Navy is the clear weak spot and the reason the sales outlook was cut. Old Navy revenue fell 4% year over year and comparable sales also declined 4%, with the company citing weaker traffic and pressure in women’s seasonal merchandise. In response, Old Navy’s full-year comparable-sales assumption moved from flat to up 1% to flat to down 1%. That deterioration was partly offset by Gap, where sales rose 9% and comparable sales rose 10%, prompting a higher high-single-digit to low-double-digit comparable-sales expectation.
The profit outlook improved, but the quality of the upgrade is mixed. FY26 adjusted EPS rose to $2.35–$2.45 from $2.30–$2.40, supported by the lower share count, lower expected interest expense, a lower tax-rate range and modest tariff relief. The sales range moved down, however, and the benefit from tariff refunds is largely a one-time item rather than recurring demand. The net message is a narrow earnings beat with better execution, not a clean acceleration in the business.
Old Navy’s leadership change adds an execution test rather than immediate financial upside. Horacio Barbeito will leave the CEO role on November 2, 2026, while Michael Francis, currently Old Navy’s chief customer officer, takes over. Because the successor is internal and the transition date is defined, this is more continuity than a strategic reset; the next evidence point is whether Francis can reverse Old Navy’s traffic and seasonal-assortment weakness.
Read the original 8-K on SEC EDGAR ↗