Gap Shares Sink as Tariffs Threaten $150 Million Hit Despite Earnings Beat

Shares of Gap Inc. tumbled over 15% in after-hours trading Thursday after the retailer warned that new tariffs could cost the company between $100 million and $150 million this year, even as it posted stronger-than-expected earnings and revenue for the fiscal first quarter.

The company initially projected that President Donald Trump’s latest round of tariffs, including a 30% duty on Chinese imports and 10% on most others, would carry a potential cost between $250 million and $300 million. However, with mitigation strategies already in place, Gap now expects the actual impact to land closer to $100 million to $150 million.

“We do not expect there to be meaningful price increases or impact to our consumer,” said CEO Richard Dickson during a CNBC interview, highlighting the brand’s efforts to shift sourcing away from China and increase domestic cotton purchases.

Despite the tariff overhang, Gap exceeded Wall Street expectations for the quarter. Earnings per share came in at 51 cents versus 45 cents expected, and revenue hit $3.46 billion, slightly above the $3.42 billion forecast. Net income rose to $193 million, up from $158 million a year ago.

Still, concerns linger. Gap’s full-year gross margin forecast of 41.8% came in below analysts’ expectations, and its current-quarter sales guidance suggests flat growth, mirroring broader retail caution.

Tariffs aren’t the only pressure point. Vietnam, one of Gap’s largest manufacturing partners, now faces a potential 46% reciprocal tariff. If enforced, that could significantly erode Gap’s bottom line. In 2024, Vietnam and Indonesia accounted for 27% and 19% of the company’s sourcing, respectively.

Nevertheless, the company is showing signs of progress on its broader turnaround strategy. Comparable sales grew 2% overall, and individual brands showed mixed but notable performance:

• Old Navy, Gap’s largest brand, posted $2 billion in sales, a 3% increase year-over-year, with strong growth in denim and activewear.

• Gap Brand delivered $724 million in sales, up 5%, with leadership attributing the success to style upgrades and impactful marketing.

• Banana Republic sales declined 3% to $428 million, with flat comps. The company acknowledged more work is needed to revive the brand despite efforts like its HBO "White Lotus" collaboration.

• Athleta struggled the most, with sales dropping 6% to $308 million and comparable sales down 8%. The brand is still clearing excess inventory and recalibrating its product direction.

Dickson emphasized that while Athleta and Banana Republic need time to rebound, the company remains confident in its broader strategy. “We truly believe strong brands can win in any market,” he said.

Gap also reiterated its plan to shrink China’s share of its sourcing to below 3% by year-end, down from less than 10% earlier this year, a move seen as crucial to its long-term resilience amid shifting trade dynamics.

Despite the market’s reaction, analysts note that Gap’s underlying performance, brand recovery, and cost control initiatives could help stabilize the business, if it can weather the unpredictable impact of international trade policy.