Investors pushed Gap Inc. (NYSE: GAP) shares sharply higher in after-hours trading on Thursday, as the apparel retailer's flagship brand continued to outperform and management raised its full-year earnings guidance. The stock climbed 15.4% to $24.00, adding roughly $1.16 billion to the company's market value.
The rally came despite a mixed quarterly report, with total revenue falling short of analyst expectations. However, the market focused on the strength of the Gap brand, which posted its tenth consecutive quarter of positive comparable sales, and the improved profit outlook.
Mixed Results Across Brands
For the fiscal second quarter ended August 1, 2026, Gap Inc. reported total revenue of $3.65 billion, a 2% decline year-over-year and slightly below the $3.69 billion consensus estimate. Adjusted earnings per share came in at $0.52, beating the analyst forecast of $0.48.
The company's brand portfolio delivered divergent performances. The Gap brand led the way with net sales of $844 million, up 9% from the prior year, and comparable sales rising 10%. Banana Republic also showed modest growth, with sales up 1% to $478 million and comparable sales up 3%.
However, the company's larger brands struggled. Old Navy, which generates the most revenue, saw sales fall 4% to $2.1 billion, with comparable sales down 4%. Athleta was the weakest performer, with sales plunging 12% to $264 million and comparable sales down 12%.
Profitability Improves
Despite the sales challenges, Gap's profitability improved. Adjusted gross margin expanded by 20 basis points to 41.4%, driven by better merchandise margins at the Gap brand and successful tariff mitigation, which offset increased promotional activity at Old Navy.
Management raised its full-year adjusted earnings per share forecast by $0.05 at both ends of the range, now expecting $2.35 to $2.45. The midpoint of this range represents approximately 12.7% growth over fiscal 2025.
However, the company adopted a more cautious sales outlook, trimming its fiscal-year revenue growth guidance to between 1% and 1.5%, down from the previous 1% to 2% range. The revision reflects lower comparable-sales expectations at Old Navy.
Turnaround Efforts at Old Navy
Old Navy is in the midst of a turnaround after seasonal product offerings fell short and foot traffic declined. Gap recently appointed Michael Francis as the brand's new president and CEO to lead the recovery effort.
Investors are betting that the strength of the Gap brand can offset the drag from Old Navy and Athleta. The company's balance sheet provides some flexibility, with $2.5 billion in cash and short-term investments at quarter-end and $399 million remaining under its share repurchase authorization.
Year-to-date, Gap has returned $726 million to shareholders, including $601 million in buybacks and $125 million in dividends.
Analyst Sentiment
Wall Street remains cautiously optimistic. According to MarketBeat, 18 analysts rate the stock as a Moderate Buy, with an average price target of $26.29. The after-hours price of $24.00 sits about 8.7% below that target, implying a forward price-to-earnings multiple of roughly 10 times the midpoint of the company's adjusted EPS guidance.
Risks remain, including limited liquidity in after-hours trading that can amplify price swings, continued underperformance at Old Navy and Athleta, and potential margin pressure from tariffs, fuel costs, and promotional activity.
The key challenge for Gap will be converting the flagship brand's momentum into sustained overall growth. Investors are watching closely to see if the company can replicate Gap brand's success across its other labels.
