Gap Inc. shares experienced a sharp decline of 17.6% to $20.60 during Friday afternoon trading, putting the retailer on course for its most significant single-day drop in approximately one year. The selloff was triggered by the company's decision to lower its full-year sales outlook, citing persistent weakness at its Old Navy chain, particularly in the women's seasonal apparel segment, with dresses leading the downturn.
The San Francisco-based apparel giant now anticipates fiscal 2026 net sales growth of 1% to 2%, down from its previous forecast of 2% to 3%. This revision overshadowed a concurrent increase in its adjusted earnings guidance, which was raised to a range of $2.30 to $2.40 per diluted share, up from $2.20 to $2.35, partly due to expected tariff relief benefits.
For the first quarter, net sales inched up just 1% to $3.5 billion, while comparable sales—measuring performance at stores and channels open at least a year—rose 2%. However, gross margin contracted by 130 basis points to 40.5%, reflecting ongoing pressure from markdowns and promotional activity. A basis point equals one-hundredth of a percentage point.
Breaking down brand performance, Gap's namesake brand posted a strong 10% increase in same-store sales, which CEO Richard Dickson described as one of the brand's best quarters in over two decades. However, results across the rest of the portfolio were uneven. Old Navy, Gap's largest chain by revenue, saw comparable sales rise just 1%. Athleta continued to struggle, with comps falling 11%, while Banana Republic managed a modest 2% gain.
Dickson emphasized on the post-earnings call that Old Navy's challenges were not due to weak consumer spending. "We are not seeing this as a consumer issue," he stated, attributing the weakness to dresses that lacked the "right fashion and value equation." This suggests the problem is more about product assortment and execution rather than broader demand trends.
Wall Street analysts reacted cautiously. Dana Telsey of Telsey Advisory Group characterized Gap's "moderated outlook as disappointing," while BTIG identified Old Navy as the "key swing factor" for the company's near-term performance. JPMorgan downgraded Gap shares to neutral from overweight and slashed its price target to $27 from $35, reflecting increased caution.
The broader retail sector also faced headwinds, with the SPDR S&P Retail ETF losing 1.8%. American Eagle Outfitters dropped 12.7% after warning about near-term margin pressure, underscoring a challenging environment for mall-based apparel retailers.
Despite the sales setback, Gap is benefiting from a profit cushion. The company expects approximately $80 million in net tariff relief to support gross profit and operating income this year, though some of that will be offset by higher fuel costs and potential promotions. Adjusted earnings exclude items such as a $313 million legal-settlement gain and a $50 million charitable contribution.
Looking ahead, Old Navy's turnaround could be prolonged if weak demand persists across dresses, swimwear, and other seasonal lines. Gap may need to increase markdowns to clear inventory, which would pressure margins as management balances growth spending with earnings targets. For now, the market's focus remains firmly on the lowered sales forecast, casting doubt on the company's ability to sustain growth amid selective consumer spending.