Gap (NYSE:GAP) released first-quarter financial results and hosted an earnings call on Thursday. Read the complete transcript below.
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The full earnings call is available at https://events.q4inc.com/attendee/544749018
Summary
The company reported a 2% increase in comparable sales, marking its ninth consecutive quarter of positive comps, with progress in key strategic categories and market share gains.
Old Navy saw a 1% increase in comparable sales, with notable growth in Active, Denim, and Kids and Baby categories, despite challenges in the women's dress segment.
Gap brand delivered a 10% increase in comparable sales, marking its 10th consecutive quarter of positive comps, driven by strong product storytelling and brand engagement.
Banana Republic's comparable sales increased by 2%, achieving its fourth consecutive quarter of positive comps, with balanced growth across categories.
Athleta's net sales decreased by 12% as it focuses on rebuilding and clearing less productive inventory, with new product introductions showing encouraging results.
The company is investing in beauty and accessories, with plans to roll out beauty products to Old Navy stores and relaunch fragrances at Gap.
The company is leveraging technology and AI to improve merchandising, customer experience, and operational efficiency.
For fiscal 2026, the company expects net sales growth of 1% to 2% and is raising its earnings per share outlook to $2.30 to $2.40, reflecting financial discipline and strategic investments.
Full Transcript
OPERATOR
Good afternoon, ladies and gentlemen. I would like to welcome everyone to The Gap Inc. First quarter 2026 earnings conference call. At this time, all participants are in a listen only mode. For those analysts who wish to participate in the question and answer session after the presentation, you May now press star 1 to enter the Q and A queue. As a reminder, please limit your questions to one per participant. If anyone should require assistance during the call, please press the star key followed by the zero key on your touch-tone phone. I would now like to introduce your host, Shirley Martin, Senior Director of Investor Relations.
Shirley Martin (Senior Director of Investor Relations)
Good afternoon everyone. Welcome to Gap Inc.'s first 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, May 28, 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 US apparel consumer service for the 12 months ending April 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.
Richard Dickson (Chief Executive Officer)
Thanks, Shirley and good afternoon everyone. Before we discuss our results for the first quarter, let me begin with a moment of remembrance for our co founder, Doris Fisher. Doris was a visionary and an extraordinary human being whose brilliance, quiet determination and heart shaped everything from Gap Inc. S indelible influence on fashion and retail to philanthropy to the San Francisco art scene. In Gap speak, she was a true original and she worked tirelessly to ensure that Gap Inc. Always did more than sell clothes, which inspires our purpose. Today we bridge GAPS to create a better world. On behalf of everyone at Gap Inc. I would like to extend our deepest condolences to the Fisher family and ensure them that the legacy Doris and Don Fisher created in Gap Inc. Will endure. Now transitioning to our results in the first quarter, we continued to execute on our strategic priorities, delivering progress across several key Metrics. Comparable sales increased 2% marking our ninth consecutive quarter of positive comps as we once again grew sales across all income cohorts. As the value proposition of our brands continued to resonate, we gained market share reflecting better product, better storytelling and building brand relevance and we outperformed our gross margin outlook reflecting continued rigor in execution. Overall, at the company level, the quarter was in line with our expectations. However, results at the brand level were more varied reflecting both the different stages of their transformation and some brand specific dynamics. As I reflect on the quarter, with three of our four brands once again delivering positive comps with standout growth at the Gap brand, we continue to demonstrate progress, yet we know some of our brands have greater potential and we are taking action to unlock stronger performance which I will discuss in more detail. In parallel, we are also investing more intentionally in our future as we build category adjacencies like beauty and accessories where we see a meaningful long term growth opportunity and capabilities such as our fashiontainment platform and technology to amplify how we connect with customers and increase productivity. Lastly, we remain committed to being strong stewards of capital as we balance long term investments with increased capital returns to our shareholders this year. This reflects the growing strength of our balance sheet and strong conviction in our long term potential. Katrina will share our updated guidance later during the call. Given the varied performance at the brand level, we are taking a moderated view of full year revenue growth. At the same time, we are raising our outlook for earnings per share reflecting continued financial and operational rigorous While we are not starting out as strongly as we anticipated, we are still early in the year. The teams are motivated to drive better results and our goal will be to outperform. Turning now to our detailed first quarter results by brand, let's start with Old Navy, our largest brand and the number one specialty apparel retailer in the country. In the first quarter, Old Navy once again grew with comp sales increasing 1% on top of last year's 3% comp growth. As noted earlier, our strategic pursuit of key categories continued to deliver results, particularly across Active, Denim and Kids and Baby, all of which posted growth versus last year. Old Navy maintained a top three rank in Denim and Kids and Baby and gained share in Denim, specifically reinforcing our leadership in these categories. We were also the only brand in the active category to maintain share within the top five, reflecting the attractive value proposition we continue to deliver. We also had a number of compelling product announcements that tied into pop culture with the launch of Old Navy's second designer collaboration featuring award winning Christopher John Rogers and a special Devil Wears product collection, capitalizing on growing buzz around the sequel. Overall results for Old Navy were primarily impacted by the women's dress business, where in reviewing the season we did not execute as effectively and as a result customers did not respond to our assortment the way that we had intended. Entering Q2, the seasonal women's dress business continues to underperform our expectations, with weakness visible across the broader seasonal product assortment as well. The team has worked swiftly to address these factors, refocusing our efforts on sharper price points and stronger customer messaging to drive conversion for the seasonal categories. Once these changes began to take hold in mid May, we saw some improvement, but we are carefully monitoring this and making continued adjustments. While we are encouraged by the recent improvement, we also recognize that this level of performance does not reflect our full potential. There is a clear opportunity to do better and we are working closely with the team to sharpen our focus and strengthen execution. As we look ahead into the second half of the year, we have several building blocks in place that give me confidence in our ability to deliver continued improvement. We are seeing Strength in Denim and Active and we expect these key strategic categories to build in prominence in the second half of the year. We are also rolling Beauty out to the full store fleet by year end and following a successful winter pilot, we are launching a first of its kind partnership with Fanatics, the global leader in sports licensing. Separately, as we continue to focus on elevating how the brand shows up to our customers, we are excited to announce the appointment of Michael Francis to the newly created role of Chief Customer Officer for Old Navy. Michael is a highly respected brand builder in retail, best known for reshaping the brand experience and building culture shaping moments at Target and Walmart, two of the largest retailers in the country. Throughout his career, he has consistently infused value apparel concepts with lifestyle aspiration and emotional resonance, redefining how customers engage with accessible fashion. Michael's appointment marks an important step forward as we position Old Navy for its next chapter of building stronger, more meaningful relationships with our customers. In this role, Michael will help sharpen our customer strategy, deepen emotional connection with our audiences, and bring even greater cohesion and consistency to how we show up across every touch point and every season. Now moving on to Gap, Gap delivered an exceptional quarter comp sales increased 10% on top of a 5% comp last year. This marks the brand's 10th consecutive quarter of positive comps as we continued to lean into our heritage of big ideas and culturally relevant narratives to drive growth. As product storytelling and brand relevance continued to strengthen, we expanded our customer file, reflecting growing engagement across generations and achieved our third consecutive quarter of reduced discounting. As we continue to execute our reinvigoration playbook, it's incredibly encouraging to see its impact broadening across additional divisions and categories. At the division level, strength in women's and consistency in men's drove the brand's performance in the first quarter, complemented by a notable return to growth in kids and baby, marking a meaningful milestone for the Gap brand. We're encouraged to see our focused turnaround efforts in Kids and baby take hold as our amplification of destination categories through collections like My First Denim and Baby and Trendrite Fleece and Denim offerings for Kids builds resonance by category. Denim remained a key driver of growth in the first quarter as our focus on delivering trend right product drove another quarter of the of market share gains. In addition, we also saw strength in fleece amplified by our sweats like this music video featuring Grammy nominated singer Young Miko. The campaign significantly outperformed benchmark goals, generating nearly 1.5 billion press and social media impressions and strongly resonated with Gen Z audiences, with gap trending on TikTok within 24 hours of launch. Founded in 1969 as a brand selling denim and records, Gap has always lived at the intersection of fashion, music and culture. That heritage came to life in a major way this quarter at Coachella, one of the world's largest and most influential music and cultural festivals. Through our iconic hoodie house activation. The experience drove strong engagement, selling roughly 10,000 custom hoodies and generating over 300 million social media and press impressions. More importantly, it served as another powerful demonstration of Gap's cultural influence, authenticity and growing relevance with a new generation of consumers. In the first quarter, we continued to reimagine Gap classics with product collaborations shaped by the distinctive creative lens of Harlem's Fashion Row, Awake New York and Victoria Beckham. With strong consumer response and engagement around the Victoria Beckham collection, we are excited about the momentum this multi season collaboration can build in the seasons ahead. Entering the second quarter, we are continuing the drumbeat of cultural relevance. Earlier this month, we were thrilled to dress Kendall Jenner in a custom Gap Studio creation designed by Zac Posen at the Met Gala showcasing the brand's highest expression of style and craftsmanship on one of the world's most iconic cultural stages. As we continue to deliver strong product and storytelling, elevating our customer experience remains paramount. With strong results from the 2025 remodel program. We plan to remodel about 30 stores this year, bringing approximately 25% of the North America specialty fleet into the new concept by year end. I'm proud of the Gap team for the consistency, creativity and clarity with which they are executing the playbook. With strength broadening across divisions and categories, continued expansion of our customer file and a growing presence in key cultural moments, Gap is truly building momentum and we look forward to continuing that in the quarters ahead. Moving on to Banana Republic Banana Republic continued to make solid progress in the quarter. Comparable sales increased 2%, reflecting the brand's fourth consecutive quarter of positive comps. Men's and women's performed well, reflecting more balanced growth across the business with strength in key categories including pants and sweaters. We continue to lean into Banana Republic's heritage and as a storytelling brand through the lens of the modern explorer. This came to life through a collaboration with the Explorers Club, featuring an archive reissue capsule reimagining some of our most iconic styles from the early decades through a contemporary lens. The collection has generated strong engagement and accolades across social conversations, reinforcing Banana Republic's distinct brand positioning. As you know, I have been leading Banana Republic through its Fix the Fundamentals stage as we conducted a search for the right leader with the brand now delivering greater consistency. Last week we announced the appointment of Donald Kohler as the new President and CEO of Banana Republic. Donald has an exceptional career journey spanning more than three decades with transformative leadership roles across iconic brands such as Calvin Klein, Tommy Hilfiger, Burberry, Ferragamo and Diesel, and including more than a decade at our very own Gap brand. Now we are excited to welcome him back to our family. Donald's operational excellence combined with his natural instincts for great design, impactful merchandising and powerful storytelling positions him strongly to lead Banana Republic's next chapter. As I turn over the reins, I want to extend my personal thanks and gratitude to the team. They have done an outstanding job strengthening the brand over the past several years and I am excited for what we can deliver. With Donald's leadership now turning to Athleta. As we shared last quarter, 2026 is a rebuild year for Athleta. Since Maggie joined as the President in August of last year, the team has been taking steps to strengthen the brand's foundation, restoring clarity to its brand purpose, repositioning talent and re architecting product and creative plans to better reflect how customers live, shop and engage with the active category. Today, as we continue to rebuild Athleta, we have been focused on clearing less productive legacy product. We made progress in the first quarter, however this process is taking longer than anticipated and put pressure on sales leading to a disappointing result for the second quarter. We remain focused on clearing the inventory so that we can begin to transition towards a cleaner assortment that better represents our go forward aspirations for the brand in the fall. As we have worked to clear, we also have been introducing new product at a smaller scale and and have seen encouraging results in the first quarter. Our launch of the Journey Travel Collection in targeted locations saw a positive customer response, driving increased engagement and strong sell through. We also saw momentum in new leg shapes across key franchises like our Heritage Elation line. These early reads are helping to inform our product direction and where we are choosing to lean in further in the coming quarters. While we recognize that it will take time for our actions to translate into an improved growth profile, Athleta remains an important brand in our portfolio and we are focused on rebuilding it for long term growth. Now moving on to our investments for beauty and accessories, we are approaching 2026 as a test and learn year focused on deepening our customer engagement, capturing insights and leveraging our learnings to inform a confident build over time in beauty. Our efforts this year are centered on our two largest brands, Old Navy and Gap. At Old Navy, as we have shared, we began piloting Beauty in the third quarter of last year in 150 select stores, engaging with our customers through various product assortments, pricing strategies and merchandising models to understand how best to meet them in their shopping journey. The pilot provided important learnings that we are applying as we roll beauty out to the rest of the fleet during the second half of this year with a path to scaling the category in 2027 and beyond. Gap, we're excited to relaunch fragrance this summer, celebrating heritage scents like Heaven and Grass with a modern expression through refreshed packaging, updated formulations and elevated storytelling. This represents a step forward in rekindling Gap's iconic appeal in fragrance through a revitalized brand identity and product lineup. Moving to accessories this year, our focus is on Gap, where we will be launching a collection in the fall that embodies the brand's spirit of individuality. I'm energized by what I see in product. It's elevated and delivers great quality at a great price and we are excited to share the collection with our customers now onto our platform capabilities. Starting with our fashiontainment platform, we see a broad opportunity across our portfolio to amplify our presence in moments that matter by bringing together fashion with music, sports and entertainment. Sports in particular is an influential force shaping fashion and trends. Our exciting partnership with fanatics is a great example of new ways we are tapping into this new arena and we will continue to explore additional opportunities tied to major global sporting moments. In the first quarter we also relaunched our loyalty program Encore, transitioning our house file of around 40 million customers from a traditional transaction based program to to a broader customer engagement platform. Technology is another important capability we are investing in. We are a fashion company that is brand led and intelligence powered. The brands create the demand by executing on the reinvigoration playbook. Intelligence enabled by data and AI empowers our teams to make decisions that drive greater consistency and efficiency. The most important place this shows up in what we call product intelligence, how we design, how we buy, how we allocate and how we replenish. We are leveraging technology and AI to help our teams make smarter merchandising decisions, improve inventory productivity and drive the right value equation for our customers. Another place this shows up is in the customer experience, making it easier to find the right product, feel confident in the fit and discover what is new and relevant. This includes extending discovery through new AI powered shopping partnerships including our recently announced partnership with Google's Gemini. We are also deploying AI across our internal operations to drive the productivity that funds our investment agenda without expanding our cost structure. We look forward to sharing more details on our technology investments and platforms in the coming quarters. In closing, first quarter results speak to continued progress in our transformation. Yet we know we need to deliver at higher levels of growth and the teams are focused on executing to this. At the same time, the fundamentals of our business remain strong and the rigor we've instilled throughout the organization are enabling continued margin expansion and growing cash flow and increased returns to shareholders this year. I want to thank our teams for their resilience and dedication to achieving the full potential of our portfolio. I will now hand the call over to Katrina to walk you through our financial results and 2026 outlook.
Katrina o'. Connell
Thank you Richard and thanks everyone for joining us this afternoon. In the first quarter we extended our track record of sustained revenue growth, operational and financial rigor combined with our reinvigoration playbook drove our ninth consecutive quarter of positive comps, reinforcing the strength and durability of our transformation. As Richard shared, this was a unique quarter for us as we navigated some variance in our brand performance with Gap Brand delivering standout growth, Old Navy coming in slightly short of our expectations, Banana Republic staying the course and Athleta seeing a more challenging quarter. Against this backdrop, I'm proud of how the teams managed the quarter, adapting as needed to deliver on our objectives. We achieved our net sales goals, exceeded our gross margin expectations and continued to optimize our cost structure, enabling us to build our brands in the quarter while simultaneously funding strategic investment in our long term growth accelerators and capabilities. We also deployed capital strategically investing back into the business while maximizing returns to our shareholders through a significant increase in share repurchases complemented by a meaningful dividend increase. We are updating our outlook today to reflect slightly lower sales expectations for the year, reflecting a moderated view of Old Navy. Our operating margin outlook remains unchanged and despite the lower revenue projections, we are raising our earnings per share outlook, the details of which I will walk through shortly. Before turning to the details of our results and outlook, I want to highlight that our first quarter and full year 2026 adjusted SG&A operating profit and earnings per share Metrics exclude a $313 million legal settlement net gain and concurrent $50 million charitable donation that occurred during the first quarter on a reported basis, both are included across these metrics. Now onto our results. Net sales of $3.5 billion increased 1% year over year with comparable sales up 2%. As I previewed last quarter, the spread between net sales and comparable sales was largely a result of lapping revenue recognized last year related to the structure of our credit card agreement by brand. Old Navy's net sales of $2 billion increased 1% year over year, with comparable sales up 1%. Old Navy continued to win in strategic categories including Denim, Active and Kids and Baby. This was partially offset by a weaker customer response to our spring dress assortment. Gap had a stellar quarter. Net sales of $796 million increased 10% year over year and Comparable sales were up 10% as the brand continued to demonstrate culturally relevant storytelling in destination categories including denim, fleece and Kids and baby. Banana Republic's net sales of $431 million increased 1% year over year, with comparable sales up 2%. The brand delivered its fourth consecutive quarter of positive comps with balanced growth across men's and women's, fueled by continued elevation in merchandising and storytelling. Athleta's net sales of $270 million decreased 12% versus last year and comparable sales were down 11% this was below our expectations as we work through legacy products while we look towards launching a stronger and more relevant assortment. Let's continue to the balance of the PNL Gross margin of 40.5% declined 130 basis points versus last year. Coming in ahead of Guidance, merchandise margins declined 100 basis points and R&D deleveraged 30 basis points. The 100 basis point decline in merchandise margins reflects an expected headwind from the net impact of tariffs of approximately 200 basis points, implying 100 basis points of underlying merchandise margin expansion. This was driven by strength and lower discounting at the Gap brand combined with better inventory management across the portfolio, partially offset by modest headwinds related to the credit card dynamic I previewed earlier. Higher fuel costs also had a slight impact in the quarter. AUR increased relative to last year across all brands as we continue to operate with discipline. On a reported basis, SG&A was $972 million. On an adjusted basis, SG&A was $1.2 billion and 35.3% of net sales. As expected, the increase to last year was primarily driven by the timing of planned investments in key growth initiatives and capabilities, including the relaunch of our loyalty program, expansion of beauty and accessories teams, and continued investments in technology and our fashiontainment platform to modernize our brands and operations through next generation capabilities. First quarter reported operating margin was 12.7% on an adjusted basis. Operating margin was 5.2%, down 230 basis points compared to last year, primarily reflecting the net impact of tariffs. Reported earnings per share were $0.90. Adjusted earnings per share were $0.38 versus last year's earnings per share of $0.51. Before I move on to the details of our cash flow and balance sheet, I would like to reiterate our capital allocation framework. Our approach remains balanced, leveraging our healthy balance sheet and robust cash profile to enhance long term shareholder value. Our first priority is investing in the business through high returning capital investments. First quarter capital expenditures were $135 million and for fiscal 2026 we continue to expect approximately $650 million in investments related primarily to stores, technology and supply chain. Second, we believe in paying an attractive dividend that grows with net income growth. In the first quarter we paid $63 million to shareholders in the form of dividends, reflecting a 6% increase in our quarterly rate to 17.5 cents per share. Additionally, the board recently approved a second quarter dividend of 17.5 cents per share and our third priority is focused on share repurchases. As previewed last quarter, we have evolved our approach to being more intentional in driving earnings accretion. Aligned with this principle, year to date we repurchased approximately $400 million worth of stock or approximately 16 million shares. Looking ahead, we have approximately $600 million remaining under our current authorization, which we will continue to deploy opportunistically as we balance our capital priorities and annual objectives. Now, turning to cash flow and the balance sheet, our cash position remains strong. We ended the quarter with $2.6 billion of cash, cash equivalents and short term investments on our balance sheet, an increase of 15% compared to last year. First quarter net cash from operating activities was $213 million inclusive of the net gain from the legal settlement and the concurrent charitable donation and free cash flow was $78 million. Disciplined inventory management resulted in end of quarter inventory levels flat to last year with units down. We continue to be rigorous in our approach to inventory and expect to operate in line with our principle of unit purchases positioned below sales. Before I move on to our outlook, I want to thank our teams for their continued focus and resilience. The foundational rigor we have established is allowing us to operate with agility, and our healthy financial position is providing us with the flexibility to be thoughtful in our investments while remaining committed to increased capital allocation and enhanced shareholder returns. Now on to our outlook. Our guidance today reflects a commitment to delivering a third consecutive year of profitable sales growth, continued operating margin improvement, and robust free cash flow generation. As is typically our practice, we are taking a balanced approach, factoring in the visibility we have into the consumer and the broader macroeconomic and geopolitical environment in the near term, while also recognizing potential uncertainties going forward. Before I share specifics on the second quarter and full year, I would like to discuss our assumptions on tariffs across two areas. First, the benefit from lower tariff rates following the Supreme Court ruling in February, and second, the potential refunds on tariffs incurred and paid for products landed in the US before the ruling. Let's start with the benefits related to lower tariff rates. Our full year outlook, shared in March, reflected tariff rates under the IEPA regime and assumed a roughly neutral net tariff impact on our profit and margins for the year, supported by substantial mitigation strategies we continue to deploy. We are updating our assumptions today to reflect Section 122 tariffs at a 10% rate on goods received after February 24 through the July 24 deadline. For the remainder of the year, we've assumed tariff rates revert back to IEPA level rates incorporated in our original plan. We maintain this assumption based in part on comments from the administration indicating an intention to reimpose higher tariff rates following the expiration of section 122, potentially at levels comparable to those implemented under the IEPA regime. Tying these pieces together, we now expect approximately $80 million, or 50 basis points of year over year net tariff relief to our gross and operating margin relative to our prior outlook for tariffs to be net neutral for the year. Given the timing of receipts, this benefit is expected to be weighted toward the second and third quarters. We are taking a balanced and prudent view in assessing how we factor this into our outlook for the company as we consider our plans in the context of three number one the consumer, number two the promotional environment and number three fuel cost pressures tied to the geopolitical environment. From what we can see today, the consumer remains resilient and while we continue to monitor their behavior at this time, our outlook does not assume any meaningful shift over the balance of the year. Their promotional environment thus far has remained rational, yet we are keeping a close watch on the extent to which companies may reinvest this year's tariff upside into pricing actions. Fuel costs are elevated and we continue to monitor geopolitical conditions and its potential implications across the broader operating environment. Therefore, on a full year basis, we are reserving the tariff relief as added flexibility to navigate the year, with approximately half of the $80 million benefit serving as a buffer against sustained elevation and fuel costs and the remaining half reserved for potential pricing investments. Should the promotional environment intensify, should fuel costs retreat meaningfully from current levels, or should the promotional environment remain rational, there would be upside to our outlook. Additionally, if the administration does not reimpose higher tariff rates upon the expiration of section 122, or if tariffs instead return to historical baseline levels, this would be another source of upside, all else equal. On the topic of tariff refunds, we are monitoring for potential recovery of previously paid IEPA tariffs where GAAP is the importer of record. Applications are currently being accepted in phases. While we are encouraged by the progress we are seeing in the industry and hopeful we will have success at this point, recognizing we have not been part of the first phase of the review process, we do not have certainty in the outcome and are not factoring in any benefits of a potential refund in our outlook today. Turning to the specifics of our outlook for fiscal 2026, beginning with net sales, as noted in our press release, we now expect full year net sales growth of 1% to 2%. The revised outlook primarily reflects a more tempered view of Old Navy's performance. Based on trends observed at the start of the year, we now expect Old Navy comparable sales to be flat to up 1% for the full year on a two year comp basis. Our outlook reflects an acceleration in the back half as spring and summer categories become a smaller part of the revenue mix and denim and active become more important and as some of our new growth initiatives such as beauty and sports licensing begin to roll out more purposefully. As Richard noted, while this is our current outlook, the teams are working hard to deliver better as it relates to the balance of the portfolio. We are adjusting the complexion of our growth expectations with building momentum. At Gap Brand, we now anticipate full year comps in the high single digits. At Athleta, our outlook reflects a slower rebuild with the second quarter trending similar to the first quarter and we continue to expect Banana Republic to post another year of comp growth consistent with our prior outlook. Turning to gross margin, we are maintaining our outlook for full year gross margins to be flat to up slightly to the prior year. We continue to expect merchandise margin expansion. With regards to R&D, we now expect deleverage of approximately 50 basis points on the year given our lower revenue outlook. As noted earlier, while the change in our tariff assumptions is expected to result in 50 basis points of net tariff relief, we are reserving this benefit as we account for potentially sustained fuel inflation and also embed pricing flexibility to react to potential changes in the competitive environment. Moving on to SG&A as we establish ourselves as a high performing company, our standard is to continuously focus on driving improvement to our cost structure for the full year. We continue to expect adjusted SG&A as a percentage of sales to be roughly flat year over year. This includes $150 million in cost savings as we enhance our efficiency and effectiveness, a portion of which will go towards managing inflation with the remaining funding our growth accelerator initiatives. As I mentioned last quarter, there is some nuance to the quarterly cadence of the investment that will cause adjusted SG&A to continue to deleverage in the second quarter before leveraging in the second half. The improvement in the second half primarily reflects two factors that we will begin to lap. First, spending on strategic initiatives that began in the second half of last year and second higher incentive compensation expense that was weighted towards the third and fourth quarter last year. Taking this all into consideration, we continue to expect an adjusted operating margin of 7.3% to 7.5% for the full year compared to 7.3% last year. At the same time, we are raising our outlook for full year adjusted EPS to $2.30 to $2.40, reflecting favorability on interest, income tax and share count. Our updated earnings outlook reflects growth in the range of 8% to 12% to last year. Interest income is now expected to be approximately $25 million. We expect a tax rate of approximately 25% and with the repurchase activity completed year to date, we anticipate a weighted average share count of approximately 375 million, down approximately 2% to last year. Now let me turn to our outlook for the second quarter of fiscal 2026. Quarter to date, the portfolio is trending largely in line with Q1 performance with the exception of Old Navy where, as Richard noted, we experienced a slow start but are seeing improvement with the changes the teams are driving. With this in mind, we expect net sales in the second quarter to be flat to down 1% year over year, with comps at Old Navy projected down in the low single digits. We expect the spread between comp and net sales to be roughly similar to the first quarter, largely reflecting the same credit card dynamic we experienced in Q1, after which we expect comp sales and net sales to track more closely. For the balance of the year. We expect second quarter gross margin to be about flat to down 50 basis points compared to last year's gross margin of 41.2%. This reflects continued merchandise margin expansion with R&D deleverage of approximately 80 basis points. Our outlook for merchandise margins incorporates net tariff relief of approximately 30 basis points combined with underlying margin expansion driven by expansion at all brands outside of Old Navy, where we expect higher promotions as we clear seasonal products. We will also experience slight headwinds from the credit card dynamic and we expect a continued slight impact from higher fuel costs. Last, we are planning for SG&A as a percentage of net sales to deleverage approximately 110 to 120 basis points compared to last year, which reflects the timing of the growth investments I spoke to earlier. In closing, while our outlook reflects our best view of the business today, as Richard noted, we are always striving for better. Our foundation remains strong, rooted in disciplined financial and operational rigor and a proven reinvigoration playbook. Our teams are operating with agility and a mindset of continuous improvement overall. This gives me confidence in our trajectory moving forward and in our ability to continue creating sustainable value both for customers and shareholders. With that, I'll open the line for questions. Operator
OPERATOR
thank you. As a reminder to ask a question, please press Star then the number one on your telephone keypad. If you would like to withdraw your question simply press Star one. Again. Your first question comes from Matthew Boss from JP Morgan. Your line is open.
Matthew Boss (Equity Analyst at JP Morgan)
Great, thanks. So Richard, to dig maybe a little deeper into the top line improvement embedded in the back half of the year at Old Navy, what is the timeline that you see to fully rightsize the product assortment and value proposition? If we're thinking about back to school at the Gap, have you seen any sequential softening in the second quarter relative to the 10% comps in the first quarter? And then at Athleta, what's a reasonable timeline for inventory optimization in your view?
Richard Dickson (Chief Executive Officer)
Okay, Matthew, there's a lot to unpack there, but I appreciate the breadth of the questions. First, zooming out. You know we delivered progress across several key metrics in the first quarter. As mentioned, it's our ninth consecutive quarter of positive comparable sales. Three out of the four brands are growing our comp's up. Two that's building on 2% comp growth from last year, outperforming our gross margin outlook by 30 basis points and winning across all income cohorts. Last but not least, returning over $450 million in cash to shareholders through dividends and repurchases. When we get into the specifics of each brand, we'll start with the Old Navy question first. Important to recognize we did deliver a 1% comp on top of last year's 3% growth that also marks this brand's sixth consecutive quarter of positive comps. Now looking at the specifics of the categories, we also continue to deliver results, particularly across Active Denim, Kids and baby. These have been really categories that we've strategically pursued, winning all of them posted growth versus last year and we continue to build relevance in those categories with our customers. Important also to mention that we maintained share overall and continue to be a top ranked brand in Active Denim and Kids and Baby. Now seasonal categories have gotten off to a weaker start in particular dresses and bluntly we have not had the right fashion and value equation for that category. The team is moving quickly obviously to drive better conversion, sharper price points, stronger messaging, and as these changes have begun to take hold, we have seen the trends improve. But given the performance that we've had in Q1 and the continued challenge in seasonal products in Q2, we are taking a moderated view on the year. That being said, we are driving for better results. So specifically when I look to the second half, seasonal categories will be behind us and I'm very confident in our ability to drive improvement. We've got some great exciting new strategic category news with back to school programming, our emphasis on active and denim, which are winning categories for us. We're investing in categories that we believe our customers will respond to. As you know, we're rolling out our beauty program to the entire fleet. We just talked about our Fanatics sports licensing partnership which is going to have exciting segments including the NFL in the fall. And so as we look at the overall Old Navy business, first half will be challenged with the with the seasonal weakness. And then as we move forward in the second half, we expect that continue to improve. Now, Gap, clearly we feel very good about the Gap brand. Importantly, the consistency that this brand is demonstrating is evident as this is now our 10th consecutive quarter of positive comps. And it's not just a positive comp, it's a double digit standout 10% comp against 5% last year. So this is really consistent growth. We're seeing the consistency across categories. Women's doing incredibly well. We're making great progress in men's and we've been improving trends in kids and baby. Category performance also remains very healthy and consistent, particularly in denim. We've been delivering clear and consistent brand messages, which is obviously resonating with our consumers, particularly with Gen Z. The collaborations that we've done continue to drive excitement and cultural relevance. At the same time, I will say we're maintaining that broad, multi generational appeal. Now Gap will continue to power its categories with trend right assortments. We're going to leverage collaborations as we move forward and you'll see great cultural moments to build upon as we move not only through the second quarter, but back in the back half. As mentioned again here, we're also relaunching our fragrance business, which is very exciting. We're launching bags to further build on the brand's momentum. And in summary, what I would say is Gap is back on the forefront of the cultural conversation. It is clearly on a roll. As an iconic American brand, we see significant Runway ahead as we continue to build momentum through great product, great storytelling, and of course, great execution. The third part of your question was Athleta. So look, Athleta, let's unpack that for a bit. You know, 2026, as we've called out, is a rebuild year for Athleta and as we continue to strengthen the brand's foundation under Maggie's leadership. Since joining in August, Maggie has taken several actions to strengthen the brand. First off, she streamlined the assortment considerably, which is resulting in better aur and margins even with the challenging top line. She's also been repositioning talent and filling in key roles in her organization. And as you can see on our website, if you take a look, we're delivering a much better creative execution for the brand. It's early, but we are seeing some good reads of the new fashion that's arriving, albeit small. But as Katrina shared, we expect Q2 to be similar to Q1, but with all the work Maggie is doing, we feel very good about where we are and the work that they're doing. To impact the second half, we've embedded a slight improvement relative to the first half trend, but let's see how the consumer responds. I will also sum up by saying Athleta remains an important brand in our portfolio and we remain focused on rebuilding it for the long term growth.
Matthew Boss (Equity Analyst at JP Morgan)
Great color. Best of luck. Thank you, Matthew.
OPERATOR
The next question comes from Dana Telsey from Telsey Group. Your line is open. Hi. Good afternoon everyone. As you think about the Old Navy business, would you say the Old Navy impact was more macro or more enhancements that you need to adjust, particularly on the women's dress business in terms of what happened. So external or internal really? And then also it's interesting, on the channel distribution stores picked up up 3% versus prior quarter flat. Online sales slowed a little bit to down 2% from the fourth quarter, up 5%. Anything you would take to note either demographically, geographically about the channel performance? Thank you.
Dana Telsey (Equity Analyst at Telsey Group)
Thank you, Dana. I'll take the first one and maybe Katrina can join in on the second one. Look, on Old Navy, we are not seeing this as a consumer issue. We actually see consistency and strength in our customer behavior. We are winning with all income cohorts. Growth across low, middle and high income customers. And as we all know, when we have the right product at the right price, value equation, customers are there. This is just a seasonal category that has just gotten off to a weaker start. And as I said, in particular dresses where we just did not have the right fashion and value equation. The team, as I mentioned again is working really hard and quickly with sharper price points and again, stronger messaging. And as these things sort of move through the system, the good news is as we look to the second half, the strength of our categories like active denim, kids and baby, getting ready for back to school and the programs that we have to build upon them give me great confidence in our ability to continue to improve as the year progresses.
Richard Dickson (Chief Executive Officer)
And then Dana, as it relates to channels in Q1, as you said, the store sales were up 3% year over year. We're really excited to see that traffic was up in stores and then online Decline was really very specific to the quarter related to two things. First of all, Athleta is our most digitally penetrated brand. And with their weaker performance, that did weigh on the overall channel. And then in addition to that, dresses really over indexes as an online business. And so with the weakness in dresses at Old Navy that also weighed on the channel overall, though, that traffic was up in online as well. And we continue to believe that's a really important channel for us going forward. Thanks, Dana.
OPERATOR
Thank you. Your next question comes from Brooke Roach from Goldman Sachs. Your line is open. Good afternoon and thank you for taking our question. Richard, Katrina, can you provide a diagnosis of what, what went wrong in your consumer insight and design process that led to this dress assortment and value equation challenge and Old Navy? What are you changing to ensure more consistency in the seasons ahead?
Brooke Roach (Equity Analyst at Goldman Sachs)
First off, Brooke, thank you for the question. I think, you know, in general, we know fashion is a dynamic business, and ultimately in this particular case, in this particular category, we just didn't deliver the right fashion value equation. It doesn't necessarily mean that everything was off. It just means it was much weaker than we had anticipated. We also have had similar weak customer response in swim and short. So when we look at the total of seasonal category strength, it's just gotten off to a really slow start. That being said, we do see momentum in those other categories, as I mentioned, and even more so in some of the other categories, including knits. We are diagnosing this very quickly in terms of where we missed. But again, as long as we see the consistency and strength in our consumer and our traffic, we believe that we can convert that into momentum, particularly moving forward into the back half. This is a learned business. Every day. We obviously want to make sure that more things go right. And in this particular case, we just have gotten off to a weaker start. And right now we're driving the changes that we need to. We're seeing them take hold. We've seen trends improve. And as we move through this, I am confident that we'll have the ability to drive improvement in the back half?
Richard Dickson (Chief Executive Officer)
Great. Thanks so much. I'll pass it on. Your next question comes from Adrienne Yee with Barclays. Your line is open. Great. Thank you very much for taking my question, Richard. I wanted to kind of focus on two things at Old Navy. I guess the first of them is the categories that are seasonal in nature. Last year you had taken some pricing up in core categories, denim and athleisure, and those are not the call out segments that are kind of causing the Slowdown at Old Navy. The ones you can talk about sort of the strength in the core. How big? If you can give us any kind of composition of how big those seasonal categories are and how much they wane into the back half and then secondarily on the beauty side, what's your go to market strategy and how big do you want that? Beauty can sometimes be a very complex new business intensive. There's a lot of kind of mess, I'll say right. Sometimes in the store. So how do you approach that kind of with the in store presentation and then kind of where do you think you want to take that in terms of categories? Thank you.
OPERATOR
Sure. So speaking specifically about the seasonal categories, you know it is not the largest part of our business, although we do have top ranking presence across nine out of the ten categories across the industry. As you know, you know, our focus has been strategically intended to drive active denim and kids and baby. And we have seen the growth of those very consistently, in particular the active business which we continue to grow and pursue as strength. So while these seasonal categories in the first half represent a significant opportunity for us, when we get them wrong, if you will, they represent a challenge. That being said, seasonal as they are, as I mentioned, we get through it by the end of the second quarter and we move into a much more robust play in the categories that we're demonstrating strength, particularly over the last several years. So I do feel confident that we'll be able to pursue those and ultimately continue to improve. Now on the beauty space, we are very excited about the expansion of beauty. When we zoom out, this is one of the fastest growing, most resilient categories in the U.S. we have studied our consumer base and the relationship that they have with the beauty category. And so we know that they're expecting and excited for our brands to carry beauty products. When you look at other fashion and apparel retailers with a beauty offering, we know the category can represent anywhere from 5% of the low to 20% of their sales. So when you look at our total volume business and even just at that low, it does represent significant opportunity. But we are taking a very purposeful approach to this. Both our assortment and merchandising strategy. It'll be a combination in old navy of third party brands as well as our own beauty offerings. We do believe that it could be a really meaningful contributor to the company over time. We are of course rolling out the beauty product into our entire fleet. As you recall, last year we piloted 150 stores. We learned a lot in that. Now we're taking that and rolling out to the balance of the fleet this year and again as a mix of third party and our own brands. And then at Gap, we're expanding it. We're relaunching our fragrance collection which had really once a very highly coveted strong customer loyalty. Following fragrances like Dream, Grass, Heaven, Om. We're going to reignite these with incredibly exciting marketing, refresh packaging, updated formulation, elevated merchandising, storytelling. The presentation will be standalone in our stores. We're working with experts and expertise to really execute this with a long term vision in mind. So stay tuned. I think you'll obviously see the launch of that this fall and Old Navy will have a full beauty assortment as we progress throughout the year.
Adrienne Yee (Equity Analyst at Barclays)
Fantastic. Thank you.
Richard Dickson (Chief Executive Officer)
Best of luck.
OPERATOR
Thanks, Adrian.
Mark Altschweger (Equity Analyst at Baird)
Your next question comes from Mark Altschweger with Baird. Your line is open.
Katrina o'. Connell
Thank you. Good afternoon, Katrina. I guess a few questions on the tariffs. Just first on the cushion you've embedded here, you know, 25 basis points for fuel, 25 for competitive flexibility. How should we be thinking about that competitive piece? Guess. Does Old Navy need to come below a certain level? Is it more about just observing what you're seeing in the promotional environment? Second, on the assumed cliff back to the IEPA level rates. How much of a gross margin headwind is embedded in the back half of the year? Q4 specifically. I'm just wondering what timing of inventory if that were to happen. Is that a back half story or is that more of a 2027 story? And then third on the refunds, understanding that it's not in the guy, you're not contemplating it, but just anything you can share on a, on a realistic range of outcomes there in terms of what you previously paid and how you think about the timing. Thank you.
OPERATOR
Yeah, sure, Mark, maybe I'll start with the aurs that we've been achieving in the business. Just to zoom out a little bit and tell you a little bit about how we're thinking about that. We've been seeing really good response to our value equation showing up in our results. So as Richard said, you know, continued positive comps, continued market share gains winning across all income cohorts. Our AUR was up low single digits in the quarter and it was up across all of our brands. So we think that's overall a sign that our pricing, our promotions, the way we're delivering product and value equation to our consumers is resonating. What we know also though is that the optimal promotional level is also very dependent on what's going on in the operating environment and so while we are focused on getting the maximum price realization on our categories, we also know that we need to be aware that there might be a dynamic that starts to arise where we need more. So what's embedded in our current outlook today are AURs that are similar throughout the year to what we just achieved in Q1 and last year. And we believe that gives us room to navigate in a normal operating environment. The tariff that we're holding aside is really there in case we need to promote more. On top of that, should the environment get more promotional as it relates to the IPA tariff in the second half that was included in our original outlook. So that is not an incremental headwind to second half. In fact, we have a lot of mitigation built in in the second half of the year. And so in the second half of the year, we had already previewed that the tariff becomes a tailwind in the back half even with that reversion, because we've were lapping last year and we have a lot of mitigation in place. And then maybe the last part of your question is really about the refund. We definitely have line of sight to what we are due in the refund. Maybe to say a little bit more about that we are using the reconciliation method and that was excluded from phase one. So we don't have a lot of news on when the reconciliation method will be included in this process. But once we know more about it and are prepared to file, we will be more forthcoming with the quantification. At this point, we just haven't really said much about it because we're not assuming that benefit in any outlook until we have more clarity on when we'll be included.
Mark Altschweger (Equity Analyst at Baird)
Thank you. Really quick follow up just on the model, on the buyback, with the timing of the repurchases you made, just what share count should we assume for Q2 specifically? And then does the 375 you gave for the year, does that contemplate any additional repurchases? Thank you.
Katrina o'. Connell
Sure. I would say the weighted average share count for Q2 is probably in that like 371 range. And then right now, what is built into the 375 is the $400 million that we've completed year to date.
OPERATOR
Your next question comes from Lorraine Hutchinson from Bank of America. Your line is open. Thank you. Good afternoon. You mentioned a need for sharper pricing at Old Navy. Do you think this is the customer's reaction to some of the higher prices and lower promotions that they saw after tariffs? And is this Something that you expect to wrap into the back to school season?
Lorraine Hutchinson (Equity Analyst at Bank of America)
No, to be honest with you, Lorraine,
Richard Dickson (Chief Executive Officer)
I think at the end of the
OPERATOR
day what we, what we do see across our portfolio is that again, when you have the right product at the right price, with the right value equation, customers are there and we're seeing consistency and strength in our customer behavior. When we look at the portfolio as a whole, again, we're winning with all income cohorts. We see the areas of strength that we've been concentrating on strategically continue to grow denim again, active kids and baby knits, fleece when again priced right with the right fashion quotient. We see the equation work. Where we're acknowledging transparently we just got off to a weak start is in dresses. And when we talk about sharper price points, these are designed to move the merchandise with stronger messages. And to some extent it also drives even more interest in traffic that halos all the other categories. So this is an expertise I would say that we have particularly in Old Navy. You know, again, we're the number one apparel specialty retailer in the country. Our pricing strategies are very precise. We know how to drive traffic and we know how to excite our consumers. In this particular case, our seasonal categories simply got off to a weaker start. That being said, you know, Q2 is going to be an area where we move through and then look to obviously recover and drive growth in the back half. But no, I don't see any reaction at this point that we would take based on the early days of seasonal category weakness.
Michael Binetti (Equity Analyst at Evercore)
Thank you.
Richard Dickson (Chief Executive Officer)
Thanks, Lorraine.
OPERATOR
The last question comes from Michael Binetti with Evercore. Your line is open. Hey guys, thanks for taking our question here. Just really quickly I'm wondering if you have, if you think there was any impact from the big tax refund season and first quarter that we should think about normalizing as we think about what the underlying rates are in the, in the businesses. And then Richard, I think you said to Matt's question earlier that trends had improved at Old Navy as the teams intervened and the seasonal categories that was a little bit unclear on what, what you expect to worsen from the one comp to the in the first quarter to the low single digit guidance. If the strategic categories sound like they're fine, the seasonals are, you know, have been intervened and are improving. Can you just help me understand if Old Navy is within the low single digit guidance range today? And then I maybe just curious a little bit more what you think might have missed the mark on the seasonals. That builds your confidence that we Just move past this and we have the design language right as we go forward.
D
This concludes the question and answer session. This concludes the question and answer session and will conclude today's conference call. Thank you for joining. You may now disconnect.
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