Gap reported potential losses of $100 to $150 million due to new tariffs on imports, as announced during their fiscal first-quarter earnings. Shares fell 15% after the announcement. The company expects tariffs could cost between $250 million and $300 million without mitigation, though it has already reduced costs by half. CEO Richard Dickson emphasized efforts to diversify sourcing and reduce reliance on China. Despite these challenges, Gap’s Q1 earnings surpassed expectations, with sales rising 2% to $3.46 billion. However, gross margin predictions fell short. Performance varied across brands, with Old Navy growing while Banana Republic and Athleta struggled.
Individuals stroll by the entrance of a Gap store in Paris, France, on July 1, 2021.
Sarah Meyssonnier | Reuters
New tariffs could affect Gap‘s operations by $100 million to $150 million, should they remain in place, the company stated Thursday during its fiscal first-quarter earnings announcement.
Shares plummeted over 15% in after-hours trading.
According to a news release, Gap indicated that new 30% tariffs on imports from China and a 10% duty on imports from most other countries will cost the firm between $250 million and $300 million without any mitigation measures. For the time being, the company is omitting this impact from its guidance.
Gap reported it has already mitigated about half of these costs and expects, without further action, that expenses will total between $100 million and $150 million, likely reflected in the balance sheet for the latter half of the year. The company plans to enhance its mitigation strategies by diversifying its supply chain and reducing its reliance on China.
CEO Richard Dickson mentioned in a conference call with investors on Thursday that the company intends to increase its cotton purchases from the U.S. to help lessen the impact of the tariffs.
“Based on current information, we do not foresee significant price increases or effects on our consumers,” Dickson shared with CNBC in an interview. “As I’ve frequently said: We genuinely believe that strong brands can thrive in any market. It’s a substantial industry and a vast market. Clearly, we hold a significant market share, but looking ahead, we see opportunities to further promote our brands and capture more market share.”
Apart from tariffs, Gap reported fiscal first-quarter results surpassing expectations both in terms of revenue and earnings.
Here’s how the apparel company performed in relation to Wall Street forecasts based on analyst surveys conducted by LSEG:
- Earnings per share: 51 cents vs. 45 cents anticipated
- Revenue: $3.46 billion vs. $3.42 billion anticipated
The reported net income for the three-month period ending May 3 was $193 million, or 51 cents per share, compared to $158 million, or 41 cents per share, the previous year.
Sales rose to $3.46 billion, reflecting an approximate 2% increase from $3.39 billion a year ago.
Gap’s guidance was mostly aligned with consensus expectations, although its gross margin outlook was weaker than anticipated. The company forecasts full-year sales growth of between 1% and 2%, consistent with LSEG projections of a 1.3% increase.
For the current quarter, it expects sales to remain flat, while LSEG anticipates a 0.2% growth. The expected gross margin stands at 41.8%, lower than the 42.5% forecasted by StreetAccount. This anticipated impact on gross margin is not related to tariff issues but instead reflects the company adjusting for certain benefits observed in the previous year related to its credit card program.
In March, prior to President Donald Trump implementing new tariffs on global imports, the company anticipated only a minimal effect from the duties. However, three months later, the situation has altered significantly.
In March, Gap noted it sourced less than 10% of its products from China, but now estimates that by year-end, this will drop to less than 3%. The Trump administration introduced a new 30% tariff on Chinese imports.
Vietnam and Indonesia stand as Gap’s two largest trading partners, with 27% and 19% of its products manufactured in these countries during fiscal 2024, respectively, according to its latest annual filing. Vietnam is facing potential 46% reciprocal tariffs, and if this duty is maintained, it could substantially impact Gap’s profits.
Trump’s trade conflict and the current tariffs are complicating Dickson’s endeavors to revitalize the legacy retailer—efforts that are already in motion and beginning to yield results.
During the quarter, comparable sales increased by 2%, in line with StreetAccount expectations of 1.8%. Both gross margin and operating margin exceeded expectations.
Here’s a closer examination of each Gap brand’s performance.
- Old Navy: Gap’s largest and most crucial brand achieved sales of $2 billion, rising 3% from the previous year. Comparable sales were up 3%, surpassing StreetAccount expectations of 2.1%. Growth was driven by denim and activewear, supported by marketing aimed at re-establishing all Gap’s brands in the cultural spotlight. Old Navy’s latest campaign, “Old Navy. New Moves,” features stars like Lindsay Lohan and Dylan Efron.
- Gap: The company’s flagship brand recorded sales of $724 million, a 5% increase compared to last year. Comparable sales were also up 5%, exceeding expectations of 3.4%. Dickson has focused much of his turnaround strategy on the Gap brand, which has performed remarkably well in recent quarters. Growth for the Gap brand was attributed to “style, product innovation, and effective marketing,” stated Dickson. “Gap is making a name for itself, and people are talking about Gap.”
- Banana Republic: The safari-themed brand continues to face challenges, with sales declining 3% to $428 million and comparable sales remaining flat, against expectations of 1.5% growth. The company emphasized its commitment to strengthening the brand. Dickson expressed optimism about Banana’s progress—such as its prominent collaboration with HBO’s popular show “The White Lotus”—but acknowledged that more work is necessary to regain customer trust.
- Athleta: The athleisure brand has also hindered Gap’s overall performance, with sales decreasing 6% to $308 million and comparable sales dropping 8%. These figures do not align with consensus estimates. The company warned that improvements at Athleta “will take time.” Dickson noted the brand has made strides in improving profitability but must address product and marketing issues to return to growth. Previously, the company indicated that it is still resolving inventory intended for trend-focused customers that did not resonate well with Athleta’s core base. “While we’ve successfully attracted new customers to the brand, we still fell short in providing enough appealing products for our large existing base, which is evident in the results,” Dickson concluded.