Gap CEO Says Banana Republic Has Begun Its Long-Awaited Turnaround as Tariffs Loom Over Outlook

Sophia Reyes · August 29, 2025 2:43 PM

Gap Inc. delivered second-quarter results on Thursday evening that came in stronger than Wall Street expected, giving investors renewed confidence in the company’s ability to steady its portfolio of iconic American brands. The highlight of the quarter was the continued resurgence of the Gap brand itself, once left behind by shifting fashion trends, but now showing real signs of momentum thanks to fresher assortments, faster product cycles, and aggressive digital marketing campaigns.

Old Navy—long the workhorse of the portfolio—maintained its steady performance, notching another quarter of growth, while Banana Republic, the higher-end brand that has struggled for years, showed what CEO Richard Dickson described as the early stages of a true turnaround. “Look, I’m very pleased with the progress that the brands are making,” Dickson told Yahoo Finance. “But we’ve got a lot more value creation coming, and I’m excited about the future.”

That optimism was tempered, however, by a more cautious stance on profit margins for the full year, as the retailer grapples with ongoing tariff uncertainty. “These are circumstances we are all dealing with,” Dickson said, noting that Gap will not compromise its long-term strategy or customer value proposition in the face of short-term headwinds.

Despite the warning, shares of Gap (ticker: GAP) managed to climb 1% on Friday, recovering from an initial dip in after-hours trading. Investors appear encouraged that the company’s top-line trends are stabilizing, even as analysts warn that tariff-related costs could weigh heavily on profitability. Citi analyst Paul Lejuez cautioned that Gap’s reliance on its value positioning, particularly at Old Navy, limits its pricing power and makes it difficult to fully offset tariff-related margin pressures.

By the Numbers

• Net sales: Flat year-over-year at $3.7 billion, slightly below estimates of $3.73 billion.

• Comparable sales: Old Navy +2% (vs. +5% last year), Banana Republic +4% (vs. 0% a year ago), Gap +4% (vs. +3% last year), Athleta -9% (vs. -4% last year).

• Gross margin: 41.2%, down from 42.6% a year ago.

• EPS: $0.57 per share, beating estimates of $0.54.

The mixed performance across the portfolio highlights the shifting fortunes of Gap’s banners. Athleta, once one of the company’s fastest-growing segments, has now posted several quarters of declines as it faces heightened competition in the athleisure market. By contrast, Banana Republic’s +4% same-store sales growth marked a major improvement from flat performance a year ago and suggests that new product assortments are beginning to resonate with shoppers.

Other Key Takeaways

• Inventory levels rose 9% year-over-year, in part due to trade war effects.

• Same-store sales have now increased for six consecutive quarters, a sign of underlying demand stability.

• Gap’s total cash position grew 13% year-over-year to $2.4 billion, giving the company flexibility to weather short-term headwinds.

• Tariffs remain the single biggest risk. If current levels persist, Gap estimates a $250 million to $300 million hit to earnings this year, though management believes it can mitigate about half of that impact, leaving a potential $100 million to $150 million drag on operating income.

Guidance
For fiscal 2025, Gap reaffirmed its outlook for net sales growth of 1% to 2%, but trimmed its operating margin expectations to 6.7% to 7% from prior estimates of up to 7.9%. For the third quarter, management guided to net sales growth of 1.5% to 2.5%, below Wall Street’s 3% estimate, and forecasted gross margin declines of 150 to 170 basis points year-over-year.

The Bigger Picture
The latest results reinforce the view that Gap is stabilizing its portfolio after years of turbulence. Its namesake brand is regaining relevance, Banana Republic is finally gaining traction, and Old Navy continues to be a steady contributor. However, persistent weakness at Athleta and ongoing tariff-related margin pressure cloud the near-term outlook.

For CEO Richard Dickson, who has been focused on revitalizing Gap’s legacy brands since taking the helm, the progress at Banana Republic is particularly meaningful. If that turnaround proves sustainable, Gap could finally see balanced growth across its portfolio for the first time in years. But with global trade uncertainty still weighing on costs, investors will be watching closely to see whether the gains in sales can translate into more durable profit growth.