Gap Inc. is bracing for a potential $100 million to $150 million hit from new tariffs, the company revealed Thursday during its first-quarter earnings announcement.
Shares fell over 15% in after-hours trading as investors weighed the cost of trade friction against early signs of a brand resurgence.
In a press release, Gap said newly imposed 30% tariffs on Chinese imports and 10% on goods from most other countries could result in $250 million to $300 million in additional costs, without mitigation.
So far, the retailer has offset about half that burden. Without further action, the remaining cost is expected to land in the $100 million to $150 million range, likely impacting results in the second half of the year.
Gap plans to continue reducing its exposure to China and is shifting its sourcing strategy.
CEO Richard Dickson told investors the company would increase purchases of U.S. cotton to help manage the impact.
“Based on what we know today, we do not expect there to be meaningful price increases or impact to our consumer,” Dickson told CNBC.
“I’ve talked about this often: We truly believe that strong brands can win in any market. It’s a big industry. It’s a big market. Obviously we’re a big player with market share, but as we look ahead, we see the potential to further market our brands and gain share.”
Despite the tariff pressure, Gap reported stronger-than-expected earnings.
Earnings per share: 51 cents vs. 45 cents expected
- Revenue: $3.46 billion vs. $3.42 billion expected
- Net income: $193 million, up from $158 million a year ago
- Sales: Up 2% year-over-year
While full-year guidance came in largely in line with analyst expectations, gross margin projections were softer.
Gap now expects full-year sales growth between 1% and 2%. For the current quarter, sales are forecasted to be flat, while gross margin is pegged at 41.8%, below the 42.5% forecast.
The margin dip is unrelated to tariffs and instead reflects year-ago credit card program benefits not repeating.
In March, the company had expected little impact from tariffs. That changed after the Trump administration issued a 30% levy on imports from China.
Gap now expects Chinese sourcing to fall below 3% by year-end, down from under 10% previously.
Its largest suppliers—Vietnam and Indonesia—accounted for 27% and 19% of product sourcing in fiscal 2024, respectively. Vietnam faces a possible 46% reciprocal tariff, which could further strain margins if implemented.
These policy shifts complicate Dickson’s broader plan to revitalize the 55-year-old retailer—a business revival that’s showing early signs of traction.
Comparable sales rose 2% last quarter, matching StreetAccount expectations. Gross margin and operating margin exceeded forecasts, suggesting Gap’s efforts are gaining ground.
Here’s a closer look at each brand’s performance:
- Old Navy delivered $2 billion in sales, up 3%, with comparable sales also up 3%. Denim and activewear led the charge, helped by a marketing push featuring Lindsay Lohan and Dylan Efron.
- Gap, the company’s namesake, brought in $724 million in sales—up 5%. Comparable sales matched that growth, outperforming estimates. The turnaround strategy, built on new styles, innovation, and bolder branding, appears to be resonating.
- Banana Republic stumbled, with sales down 3% to $428 million and flat comparable sales. While initiatives like the “White Lotus” collaboration show promise, the brand continues to face headwinds.
- Athleta remains a sore spot, with sales down 6% to $308 million and comps dropping 8%. The company admitted product and marketing missteps, and said it’s still working through trend-heavy inventory that didn’t connect with core customers. Dickson noted that while new customers are coming in, the brand hasn’t yet re-engaged its loyal base.
Gap’s path forward is lined with obstacles—geopolitical and otherwise—but the company is no longer standing still.
As Dickson pushes for relevance and resilience, the next few quarters will reveal whether the reinvention holds.
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