The Gap, Inc. GAP delivered another solid gross margin in the second quarter of fiscal 2026, reflecting disciplined pricing, inventory management and lower discounting across much of its portfolio. Adjusted gross margin came in at 41.4%, expanding year over year despite uneven sales trends across brands. Merchandise margin benefited particularly from strength at the Gap brand, while Banana Republic and Athleta also supported profitability. This helped offset greater promotional activity at Old Navy, where the company cleared challenged seasonal merchandise.
Adjusted gross margin increased 20 basis points, while merchandise margin expanded 80 basis points in the quarter. About 30 basis points of the merchandise-margin improvement came from tariff-mitigation actions, although that benefit was largely used to offset higher fuel costs. Looking ahead, GAP expects third-quarter gross margin to rise 25-75 basis points from last year’s 42.4%, supported by an estimated 150-basis-point tariff benefit. For fiscal 2026, management now expects adjusted gross margin to increase slightly year over year, aided by higher average unit retail, better sell-throughs and lower discounting.
Still, sustaining margin expansion through the second half will depend on execution. GAP plans to use some of the margin strength generated by the Gap brand and tariff relief to improve Old Navy’s assortment, pricing and value proposition, which could temper merchandise-margin gains near term. Higher fuel expenses and roughly 50 basis points of full-year rent, occupancy and depreciation deleverage also remain headwinds. Nevertheless, continued lower discounting, better inventory productivity and disciplined cost management should provide support, leaving GAP positioned to preserve modest gross-margin improvement if Old Navy’s recovery gains traction.
GAP’s Price Performance, Valuation & Estimates
Shares of this Zacks Rank #3 (Hold) company have lost 10.4% in the past six months compared with the industry’s decline of 10.6%.
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From a valuation standpoint, GAP trades at a forward price-to-earnings ratio of 8.21X compared with the industry’s average of 12.18X.
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The Zacks Consensus Estimate for GAP’s current fiscal-year sales and earnings implies year-over-year growth of 0.9% and 13.2%, respectively. For the next fiscal year, the consensus estimate indicates a 2.2% rise in sales and 9.3% growth in earnings. The company’s EPS estimate for both fiscal years has increased in the past seven days.
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Key Picks
Superior Group of Companies, Inc. SGC produces, manufactures and sells promotional products and branded uniforms, and healthcare apparel and accessories in the United States and internationally. At present, SGC carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Superior Group of Companies’ current fiscal-year sales and earnings implies growth of 3.1% and 39.1%, respectively, from the year-ago figures. SGC delivered a trailing four-quarter earnings surprise of 90.2%, on average.
Abercrombie & Fitch Co. ANF operates as an omnichannel retailer in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific. It has a Zacks Rank of 2 at present. ANF delivered an earnings surprise of 13.6% in the trailing four quarters, on average.
The Zacks Consensus Estimate for Abercrombie & Fitch’s current fiscal-year sales and earnings implies growth of 4.8% and 15.8%, respectively, from the year-ago reported figures.
Boot Barn Holdings, Inc. BOOT operates specialty retail stores in the United States and internationally. It has a Zacks Rank of 2 at present. BOOT delivered an earnings surprise of 11.4% in the trailing four quarters, on average.
The Zacks Consensus Estimate for Boot Barn’s current fiscal-year sales and earnings implies growth of 15.7% and 22.6%, respectively, from the year-ago reported figures.
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The Gap, Inc. (GAP): Free Stock Analysis Report
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This article originally published on Zacks Investment Research (zacks.com).