Gap Set to Report Q2 Earnings: Here's What Investors Should Know

The San Francisco, CA-based company has a trailing four-quarter earnings surprise of 2%, on average. In the last reported quarter, the company’s earnings delivered a negative earnings surprise of 2.6%.

Factors Likely to Impact Gap’s Q2 Results

Gap’s fiscal second-quarter performance is likely to have benefited from continued momentum at the Gap brand, supported by stronger product relevance and effective brand storytelling. The company has been leaning into trend-right assortments across denim, fleece, women’s apparel and kids and baby, while maintaining consistency in men’s. Collaborations and culturally relevant marketing have also helped Gap strengthen its connection with younger consumers without losing its broader multigenerational appeal. Management indicated that customer engagement remained healthy entering the quarter, suggesting that product innovation, clearer brand messaging and improving customer experiences may have continued to support demand.

Old Navy, however, is likely to have been a key drag on the company’s fiscal second-quarter sales performance. While core categories such as denim, active and kids and baby continued to resonate with shoppers, seasonal categories remained challenged. In particular, the women’s dress assortment did not deliver the right combination of fashion and value, while weakness was also seen in other seasonal offerings such as swim and shorts. Management responded with sharper price points and stronger customer messaging, and noted some improvement as these actions took hold. Nevertheless, the need to work through weaker seasonal merchandise likely weighed on conversion and increased promotional activity during the quarter.

Performance across Banana Republic and Athleta is also likely to have shaped the overall quarter. Banana Republic entered the period with improving consistency across men’s and women’s apparel, supported by stronger merchandising and storytelling around its modern-explorer positioning. Athleta, on the other hand, remained in a rebuilding phase. The brand continued clearing less productive legacy merchandise while gradually introducing a cleaner assortment designed to better reflect changing customer preferences in the active category. Although early customer response to selected new products was encouraging, management acknowledged that the transition would take time, making Athleta a likely headwind to consolidated sales during the second quarter.

For the second quarter of fiscal 2026, GAP expects net sales to be flat to down 1% year over year and gross margin to be flat to down 50 basis points, with Old Navy pressured by seasonal-category softness that management attributed primarily to execution in dresses and certain other seasonal assortments Operating expenses, as a percentage of sales, to deleverage about 110-120 basis points from 33.4% seen in the year-earlier quarter.

Profitability is likely to have reflected a mix of disciplined inventory management and continued cost pressures. Gap has remained focused on reducing discounting where demand is healthy and using data and technology to improve merchandising, allocation and inventory productivity. However, higher promotions needed to clear seasonal merchandise at Old Navy may have limited some of these benefits. Elevated fuel costs and the timing of investments in initiatives such as loyalty, beauty and accessories, technology and the company’s Fashiontainment platform could also have weighed on operating leverage. Thus, despite continued operational discipline and pockets of strong brand momentum, a softer sales mix and elevated investment spending may have pressured second-quarter earnings performance.

What the Zacks Model Unveils for GAP

Our proven model does not conclusively predict an earnings beat for Gap this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. But that’s not the case here. You can uncover the best stocks before they're reported with our Earnings ESP Filter.

Gap currently has an Earnings ESP of 0.00% and a Zacks Rank of 3.

Valuation Picture of GAP Stock

Going by the price/earnings ratio, the stock is currently trading at 8.09 on a forward 12-month basis, lower than 13.15 for the Retail - Apparel and Shoes industry. Also, it is trading lower than its median of 10.48.

The recent market movements show that Gap’s shares have lost 25.6% in the past six months compared with the industry's 16.3% decline.

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Stocks With the Favorable Combination

Here are some companies, which, according to our model, have the right combination of elements to beat on earnings this reporting cycle.

Abercrombie & Fitch Co. ANF currently has an Earnings ESP of +4.49% and a Zacks Rank #3. The company is likely to register growth in the top line when it reports second-quarter fiscal 2026 numbers. The Zacks Consensus Estimate for ANF’s quarterly EPS is pegged at $1.90, suggesting an 18.1% decline from the year-ago period’s actual. The consensus mark has been stable in the past 30 days.

The consensus estimate for ANF’s quarterly revenues is pegged at $1.24 billion, which implies growth of 2.7% from the prior-year quarter’s actual. Abercrombie has a trailing four-quarter earnings surprise of 8.1%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

Five Below Inc. FIVE currently has an Earnings ESP of +20.8% and a Zacks Rank #2. The company is likely to register growth in the top and bottom lines when it reports second-quarter fiscal 2026 numbers. The Zacks Consensus Estimate for FIVE’s quarterly EPS is pegged at $1.28, suggesting 58% growth from the year-ago period’s actual. The consensus mark has been stable in the past 30 days.

The consensus estimate for FIVE’s quarterly revenues is pegged at $1.2 billion, which implies growth of 17.9% from the prior-year quarter’s actual. Five Below has a trailing four-quarter earnings surprise of 70.1%, on average.

Ulta Beauty, Inc. ULTA currently has an Earnings ESP of +1.20% and a Zacks Rank of 3. The consensus estimate for the quarterly revenues is pegged at $2.97 billion, which indicates a rise of 6.5% from the figure reported in the prior-year quarter.

The Zacks Consensus Estimate for Ulta Beauty’s upcoming quarter’s EPS is pegged at $6.17, which implies a 6.8% increase year over year. ULTA delivered a trailing four-quarter earnings surprise of roughly 10%, on average.

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This article originally published on Zacks Investment Research (zacks.com).

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