Gap stock sinks after-hours as weak outlook overshadows strong Q1

Gap Inc. (GPS) shares fell over 15% in after-hours trading despite Q1 revenue of $3.5 billion and EPS of $0.51, both exceeding estimates, as a flat Q2 revenue forecast and concerns about tariffs weighed on investor sentiment. While Q1 comparable sales rose 2%, the company anticipates tariffs could cost $100 million to $150 million net for the full year, largely impacting the second half, overshadowing positive trends like Old Navy's continued market share gains and a 60 basis point gross margin improvement.

Analysis

Gap Inc. reported first-quarter financial results that surpassed analyst expectations, with revenue reaching $3.5 billion, a 2% year-over-year increase, and earnings per share of $0.51, beating estimates of $3.42 billion and $0.45 respectively. Comparable sales also exceeded projections, rising 2% company-wide, driven by a 3% increase at Old Navy (its ninth consecutive quarter of market share gains) and a 5% rise at the Gap brand, while Athleta posted an 8% decline. Gross margin improved by 60 basis points to 41.8%, and online sales grew 6%, now constituting 39% of total revenue. Despite these positive Q1 metrics and the CEO highlighting five straight quarters of positive comparable sales, the company's stock (NYSE:GPS) plummeted over 15% in after-hours trading. This severe market reaction was primarily attributed to a flat year-over-year revenue forecast for the second quarter and significant concerns regarding tariffs, which are projected to have a net impact of $100 million to $150 million for the full year, predominantly in the second half. While Gap maintained its full-year revenue growth forecast of 1% to 2% and expects an 8% to 10% increase in operating income, the near-term headwinds, coupled with a 7% rise in inventory to $2.1 billion and negative free cash flow of $223 million, have evidently overshadowed the Q1 outperformance and fueled a strongly negative sentiment.

Key Decisions for Investors

• Investors should anticipate continued share price pressure and may consider re-evaluating their exposure to Gap (GPS) given the market's significant negative reaction to the flat Q2 revenue guidance and the substantial H2 tariff headwind.
• Closely scrutinize Gap's ability to effectively manage the projected $100 million to $150 million net tariff impact in the second half, as failure to mitigate this could jeopardize the company's maintained full-year operating income growth target of 8% to 10%.
• Assess the risk posed by Athleta's 8% comparable sales decline and the 7% increase in inventory, as these factors could challenge the overall brand reinvigoration narrative and potentially weigh on future profitability and cash flow, despite strength in Old Navy and the Gap brand.