Key Brands Thrive at Gap; Shares Look Promising

Key Morningstar Metrics for Gap

Gap’s Earnings Report: A Closer Look

Gap Inc. (GAP) exhibited **robust growth** with a **2% increase in same-store sales** in the first quarter of 2025, underscored by a notable **3% rise from Old Navy**. Despite these encouraging numbers, **share prices plummeted by 15%** on May 29 amid tariff anxieties.

Why This Matters: Following the tariff announcement on April 2, Gap’s shares experienced **an impressive rally, surging over 50%** as investors focused on the company’s **transformation strategy** rather than external pressures.

• Gap’s strategic efforts in **merchandising, store operations, and marketing** have yielded promising results, particularly for Old Navy, which constitutes **58% of sales**, alongside the Gap brand making up **21%**.
• Notably, **Old Navy’s comparable sales exceeded expectations**, registering a growth of **3% against our 2% estimate**, while Gap Global surpassed its **1% forecast** with a **5% increase**.

Looking Ahead: Despite the turbulent market, we do not anticipate significant deviations from our **$28 per share fair value estimate**. Our analysis leads us to believe that **fears surrounding tariffs may be overstated**, as Gap remains committed to making **strategic investments** aimed at fostering **consistent sales growth** and targeted **operating margins** of **7.5%-8%**.

• At the current proposed tariff levels (30% on China and 10% on most other countries), Gap projects a potential impact of **$100 million-$150 million** on operating income in 2025, which translates to approximately **10% of its anticipated operating profit**.
• Yet, considering our **10-year discounted cash flow model**, we find that even a temporary dip in operating profit has a minimal bearing on overall valuation.

Interpreting the Results: Other brands within the Gap umbrella, including **Banana Republic (12% of sales)** and **Athleta (9%)**, experienced challenges, with Banana Republic showing flat sales and Athleta experiencing a **8% decline**, contrasted with our predictions of **-2%** and **-5%**, respectively.

• Despite recent setbacks, **Athleta possesses significant growth potential** in the burgeoning women’s athleisure market. We are optimistic that new product lines will spearhead a return to **mid-single-digit sales growth by 2026**.