The Gap, Inc. 2027 Q2 Earnings Call

Good afternoon, everyone. Welcome to Gap Inc.'s Second Quarter Fiscal 2026 Earnings Conference Call. Before we begin, I'd like to remind you that the information made available on this conference call contains forward-looking statements that are subject to risks that could cause our actual results to be materially different. For information on factors that could cause our actual results to differ materially from any forward-looking statements, please refer to the cautionary statements contained in our latest earnings release, the risk factors described in the company's annual report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2026, and other filings with the Securities and Exchange Commission, all of which are available on gapinc.com. These forward-looking statements are based on information as of today, August 27, 2026, and we assume no obligation to publicly update or revise our forward-looking statements.

Our latest earnings release and the accompanying materials available on gapinc.com also include descriptions, and where available, reconciliations of financial measures not consistent with generally accepted accounting principles. All market share data referenced today will be from Circana's U.S. Apparel Consumer Service for the 12 months ending July 2026, unless otherwise stated. Joining me on the call today are our Chief Executive Officer, Richard Dickson, and Chief Financial Officer, Katrina O'Connell. With that, I'll turn the call over to Richard.

Thanks, Shirley, and good afternoon, everyone. In the second quarter, while the company exceeded our profit expectations, we delivered a net sales decline of 2% with mixed performance on the top line across the portfolio. While not the revenue outcome we wanted, continued operational and financial rigor contributed to gross margin strength. We also maintained market share reflecting the continued resonance of our brand portfolio. The Gap brand delivered another exceptional quarter with comparable sales increasing 10%, and Banana Republic continued to build momentum, posting its fifth consecutive quarter of positive comps. Athleta's top line remained pressured, though we saw encouraging improvements in inventory productivity. At Old Navy, as we previewed on last quarter's call, seasonal categories continued to weigh on performance. While we took actions to address this as the quarter progressed, we also experienced a slowdown in traffic, which led to a modest miss versus our expectations.

While this is disappointing, I have confidence in our plans to improve performance in the second half. Over the past quarter, Katrina and I have been deeply involved with the Old Navy team in conducting a thorough review of the business. We have a clear understanding of where our execution fell short and have moved quickly to strengthen our plans, the details of which I will get into in a few minutes. Based on August trends, we are also encouraged by the improvement we are seeing, and we are focused on delivering for the second half. Beyond our near-term priorities, we continued to make long-term investments to advance our next phase of growth. We continue to expand beauty and accessories while building our fashiontainment and technology platforms to deepen customer engagement, strengthen our brands, and enhance our operations.

We also demonstrated our commitment to shareholder returns through our dividend and meaningful share repurchases in the quarter, reflecting both the strength of our balance sheet and our confidence in the long-term opportunity. As we factor in our second quarter performance, we are narrowing our full year revenue outlook. At the same time, we are raising our margin and EPS outlook, as Katrina will share shortly. We are confident in the roadmap we have put in place for the second half and remain focused on disciplined execution and delivering further improvement. Turning now to our detailed second quarter results by brand, starting with Old Navy. In the second quarter, Old Navy's comparable sales declined 4%. As we previewed last quarter, we expected the women's summer seasonal assortment to pressure performance, and that played out largely as anticipated, accounting for approximately 3 points of the comp pressure in the quarter.

In particular, we experienced declines in dresses, shorts, and swim, where we made some assortment and pricing decisions that impacted our value equation. What we did not anticipate was the degree to which our marketing would fall short in driving traffic. We are not satisfied with this result and have responded quickly. As we move into the third quarter, the headwind from summer categories becomes much less significant. This gives us a clear runway for improvement as key categories like denim, active, sweaters, and knits drive the business. Additionally, as we sharpen fashion content and pricing, we believe our fall assortment will provide an improved value equation. In denim, we are solidly positioned as the third-largest denim brand in the country. With great quality denim for the whole family at highly attractive price points, we are building Old Navy as a denim destination.

Following strong first-half performance, denim will grow in importance during the second half as we build on the momentum we are seeing in newer silhouettes like low rise and baggy, while introducing more fashion and choice, all at great value. In knits, legacy franchises remain healthy while we chase into untapped growth in newer franchises like Hug and Heavyweight. In active, Old Navy is the fifth-largest brand in the country. With the success we have had and continued innovation, this fall, we are amplifying our presence in the category with the introduction of Old Navy Sport. Beginning with an elevated merchandising experience, including approximately 40 shop in shops in select stores and storytelling centered on technical innovation and style at an incredible value. Old Navy Sport will become Old Navy's active brand.

In beauty, building on our successful pilot last fall, this week, we launched our Old Navy Beauty Co. collection nationwide, expanding Old Navy into a destination for everyday essentials from style to beauty. Next month, we are expanding our partnership with Fanatics, bringing our first exclusive collection of licensed sports merchandise to customers at Old Navy's signature value, enabling us to capitalize on key moments in the sports calendar, beginning with football season. In addition to product, we have rewired our marketing strategy to improve traffic trends. Our fall denim campaign, featuring music artist and television personality Cardi B, launched earlier this month and is off to a good start, driving improvement in traffic. Building on its success, this week, we launched Cardi's Cardi, extending the reach and relevance of the campaign into knits.

In addition, as we build excitement and momentum for back to school, we have partnered with leading digital creator MrBeast on a multi-part content series highlighting the incredible style, expression, and value in Old Navy's back-to-school collection. With improved execution in August, we have seen the business pick up, reinforcing our confidence in the actions we are taking. We are clear on the path forward, and we believe we can drive stronger results from here. As we execute on our fall plans, we are separately announcing this afternoon that we are advancing a planned leadership transition with the appointment of Michael Francis as Old Navy's new brand president and CEO, succeeding Haio Barbeito, effective Monday, November 2nd. Haio is working closely with Michael in an advisory capacity to ensure a smooth transition.

I want to thank Haio for his leadership and contributions to Old Navy in strengthening the foundation of the brand, scaling our strategic categories, and positioning the business for a new phase of growth. Since the beginning of our transformation, Old Navy has grown its annual revenue by nearly half a billion dollars, further strengthening its position as the number one specialty apparel brand and retailer in the U.S. As we look ahead to the brand's next phase, Michael's deep experience in customer-centric brand building and track record of strong commercial execution will be instrumental in unlocking the brand's full potential, and I am confident that now is the right time for him to step into this role. Michael has a proven ability to connect creativity, culture, and commerce in ways that will energize the business.

I've seen this firsthand as we have worked closely together to develop our plans for the second half and position Old Navy to capture the significant opportunity we see ahead. Now moving on to Gap. Gap delivered another excellent quarter. Comparable sales increased 10%, marking its 11th consecutive quarter of positive comps. As we continue to strengthen product and storytelling through big ideas and culturally relevant narratives, we are deepening customer engagement and further strengthening the brand. That momentum is reflected in the continued expansion of our customer file and yet another quarter of lower discounting. We also posted another quarter of market share gains. Importantly, Gap's momentum continues to be broad-based. Women's led performance in the quarter, while men's also delivered solid results. Kids and baby also accelerated as customers continued to respond positively to our more elevated product aesthetic.

By category, denim and fleece once again drove the business, underscoring the continued strength of our destination categories. Gap continues to solidify its cultural relevance with customers, connecting fashion and creativity through compelling collaborations and partnerships. In the second quarter, we teamed up with Hailey Bieber, one of fashion's most influential tastemakers, to reimagine two of Gap's signature denim silhouettes for a new generation. The Hailey Jean sold out quickly while driving strong traffic and a meaningful halo across the broader business. This was a great start and there's more to come. As we look ahead, we are building on our success in elevating core categories, while also now investing in growth accelerators to expand Gap's relevance across more aspects of consumers' lifestyles. We ended the second quarter relaunching our iconic Gap fragrance line.

Early customer response has been encouraging, reinforcing both our heritage and our confidence in the long-term opportunity in beauty. We are expanding into Gap accessories, beginning with bags, launching with Fashion Week in September. Marketing continues to resonate, playing into Gap's heritage in music with the latest release of Denim On My Own, featuring musical artist Malcolm Todd in Gap denim in a reinterpretation of Robyn's iconic Dancing On My Own. In addition, we continue to elevate the customer experience. Our store remodel program remains on track with upgraded stores outperforming the rest of the fleet. We expect to complete approximately 35 remodels this year, bringing roughly one quarter of our North America specialty fleet into our latest concept by year-end. I'm incredibly proud of the Gap team and what they continue to accomplish.