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Solid Performance Overshadowed by Tariff Woes

Gap Inc. (NYSE: GPS) delivered better-than-expected first-quarter earnings, with net income reaching $193 million, up from $158 million a year ago. However, the upbeat report was clouded by a stark warning: escalating U.S. tariffs could cost the company up to $150 million, even after mitigation strategies. As a result, Gap shares dropped more than 15% in after-hours trading on Thursday.

Tariff Turbulence: A Costly Turnaround Obstacle

Gap announced that new U.S. tariffs—30% on Chinese imports and 10% on goods from several other countries—could hit the company with $250 million to $300 million in added costs if left unaddressed. So far, the company has been able to offset roughly half of these expenses, trimming the anticipated impact to $100 million to $150 million. These losses are expected to become more visible in the latter half of the fiscal year.

To counteract the damage, Gap CEO Richard Dickson revealed plans to reduce the company’s reliance on Chinese manufacturing. Gap had already decreased sourcing from China to under 10% as of March, and now aims to lower that figure to below 3% by year-end. The company is pivoting toward alternative suppliers in Vietnam and Indonesia, which currently account for 27% and 19% of production, respectively. However, Vietnam faces a potential 46% retaliatory tariff, which could significantly affect Gap’s cost structure moving forward.

Strategic Shifts: From Mitigation to Marketing

“We’re not planning any meaningful price increases for consumers,” Dickson emphasized on the company’s earnings call. “Strong brands can win in any market. That’s why we’re leaning into product innovation, brand storytelling, and diversified sourcing.”

To further hedge against supply chain risk, Gap is increasing its purchase of U.S.-grown cotton and intensifying efforts to strengthen brand identity across its portfolio.

Earnings Snapshot: Outpacing Expectations

Despite trade-related uncertainty, Gap posted impressive quarterly results:

• Earnings per share: $0.51 vs. $0.45 expected
• Revenue: $3.46 billion vs. $3.42 billion expected
• Net income: $193 million, up from $158 million YoY
• Comparable sales: +2% (vs. +1.8% expected)

Revenue rose 2% year-over-year, from $3.39 billion, driven by higher foot traffic and stronger online sales. However, gross margin guidance for the full year came in below analyst estimates at 41.8%, missing StreetAccount’s forecast of 42.5%—a drop attributed not to tariffs, but to waning benefits from Gap’s co-branded credit card program experienced last year.

Full-Year Outlook: Modest Growth Ahead

For fiscal 2025, Gap expects:

• Revenue growth: Between 1% and 2%
• Q2 sales: Flat growth (vs. 0.2% expected)
• Gross margin: 41.8%, below expectations

This outlook is consistent with LSEG estimates, but analysts remain cautious given the uncertain macroeconomic and trade environment.

Brand-by-Brand Breakdown: Mixed Results

Old Navy

• Sales: $2 billion (+3% YoY)
• Comparable sales: +3% (vs. 2.1% expected)
  Old Navy led the charge, supported by a high-performing denim line and a celebrity-powered ad campaign, “Old Navy. New Moves,” featuring Lindsay Lohan and Dylan Efron.

Gap Brand

• Sales: $724 million (+5% YoY)
• Comparable sales: +5% (vs. 3.4% expected)
  Dickson’s turnaround focus on the Gap brand is showing results, with gains attributed to refreshed product lines, innovation, and a bolder marketing strategy.

Banana Republic

• Sales: $428 million (-3% YoY)
• Comparable sales: Flat (vs. +1.5% expected)
  The brand continues to struggle, though its collaboration with HBO’s The White Lotus garnered positive buzz. Dickson said improvements are underway but acknowledged that regaining customer trust remains a challenge.

Athleta

• Sales: $308 million (-6% YoY)
• Comparable sales: -8%
  Athleta’s underperformance continues to weigh on the company. While efforts to streamline inventory and improve profitability are in motion, Dickson admitted that product alignment and marketing still lag behind consumer expectations.

Broader Context: Trade Policy’s Retail Ripple Effect

Gap’s situation underscores how volatile global trade policies—particularly under the Trump administration—continue to reverberate through the U.S. retail sector. With reciprocal tariffs threatening imports from key partners like Vietnam, and potential new duties on Mexican or Indian exports still under discussion, apparel companies face increased pressure to rethink their global sourcing strategies.

Other major retailers such as Nike, Levi Strauss, and PVH Corp. (owner of Tommy Hilfiger and Calvin Klein) are also scrambling to adjust. Levi’s recently disclosed a potential $60 million tariff impact, while PVH is exploring new supplier bases in Bangladesh and the Dominican Republic to curb risk.

Conclusion: Strong Core, Shaky External Climate

Gap’s Q1 report confirms that the retailer’s internal strategies—product revamp, brand clarity, and operational improvements—are gaining traction. However, trade volatility remains a significant external risk, potentially undermining profitability if tariff pressures continue to mount.

Investors and analysts will be watching closely to see how effectively Gap navigates these global headwinds in the quarters ahead.