Key Highlights
- Gap (GAP) shares climbed 11% following a Q2 earnings report showing $0.52 per share versus the $0.48 Wall Street consensus
- Quarterly revenue totaled $3.65 billion, missing the $3.69 billion analyst projection by a slim margin
- The company’s Old Navy division, responsible for approximately 60% of total revenue, experienced a 4% sales decline compared to the prior year
- Michael Francis was appointed as Old Navy’s new chief executive, succeeding Haio Barbeito who will step down on November 2
- Investment firm UBS lifted its GAP price target from $40 to $42 while reaffirming its Buy recommendation
Gap’s second-quarter financial results showed earnings per share reaching $0.52, surpassing the analyst consensus of $0.48. The company generated $3.65 billion in quarterly revenue, falling marginally short of the anticipated $3.69 billion. Following the announcement, shares rallied 11%.
The positive earnings surprise coincided with a significant management transition at Old Navy. The retailer announced that Michael Francis, who currently serves as the brand’s chief customer officer, will assume the CEO position from Haio Barbeito effective November 2. Barbeito has led the division since 2022.
Old Navy’s quarterly sales reached $2.1 billion, representing a 4% year-over-year decline. Comparable store sales similarly decreased by 4%, underperforming the 2.4% drop that analysts had anticipated. This marks a sharp reversal from the previous year when the brand delivered 2% comparable sales growth.
Given that Old Navy generates close to 60% of Gap’s consolidated revenue, its persistent underperformance has become a significant concern for the parent company. The executive transition represents a strategic move to address these ongoing challenges.
Company Adjusts Full-Year Sales Projection
Gap’s consolidated comparable sales declined 1% during the quarter, with brick-and-mortar locations experiencing a 3% decrease. Management revised its full-year sales growth outlook downward, narrowing the range from 1%-2% to 1%-1.5%, primarily due to Old Navy’s continued softness.
In more positive news, the company increased its annual earnings per share guidance to a range of $2.35 to $2.45.
Gap disclosed receiving $95 million in tariff refunds during the quarter, which it deployed to reduce prices on select merchandise. Additional tariff refund proceeds are anticipated in the third quarter.
Wall Street Analysts Increase Valuation Targets
UBS Securities upgraded its price objective on GAP from $40 to $42 while maintaining its Buy rating. The investment bank projects earnings per share expansion of 23% in fiscal 2027, a significant acceleration from 12% growth expected in 2026 and a 3% contraction in 2025.
According to UBS, this earnings trajectory could support a price-to-earnings multiple expansion from 8x to 13x. Gap currently trades at approximately 8.5 times earnings.
The investment firm highlighted Gap’s growing beauty and accessories categories as important revenue drivers. UBS also noted that the company’s share repurchase initiative has exceeded initial projections.
While UBS recognized Old Navy’s disappointing first-half 2026 comparable sales results, the firm anticipates Gap will resolve these operational challenges within the next two quarters.
Among 15 analysts covering Gap stock, the consensus rating stands at Moderate Buy, comprising seven Buy recommendations and eight Hold ratings issued over the past three months. The average analyst price target of $26.36 suggests potential upside of approximately 27% from current trading levels.
UBS views the current valuation as offering an attractive risk-reward profile for investors.
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