GAP Q3 Deep Dive: Brand Reinvigoration and Product Momentum Drive Outperformance

Clothing and accessories retailer Gap (NYSE:GAP) reported Q3 CY2025 results beating Wall Street’s revenue expectations, with sales up 3% year on year to $3.94 billion. Its GAAP profit of $0.62 per share was 5.6% above analysts’ consensus estimates.

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StockStory’s Take

Gap’s third quarter results drew a positive response from the market, as the company reported better-than-expected revenue and earnings. Management credited the performance to the continued revitalization of its core brands, particularly Old Navy and Gap, which both achieved strong comparable sales growth. CEO Richard Dickson emphasized the importance of product innovation and targeted marketing campaigns, noting, “Our playbook, rooted in purpose, powered by creativity, and executed with excellence, is working.” The company also highlighted disciplined inventory management, reduced promotional activity, and robust customer demand across income groups as drivers of improved operating execution this quarter.

Looking ahead, Gap’s outlook is shaped by ongoing investments in product development, strategic brand collaborations, and efforts to mitigate external cost pressures such as tariffs. Management plans to continue expanding into high-potential categories like beauty and to maintain a balanced approach to pricing. CFO Katrina O’Connell emphasized, “We remain committed to reinvesting a portion of our cost savings into future growth projects, including beauty and accessories.” The company expects to leverage supply chain efficiencies and disciplined cost controls to support margin expansion while navigating a dynamic consumer and macroeconomic environment.

Key Insights from Management’s Remarks

Management attributed Gap’s recent performance to strong product execution, targeted partnerships, and a disciplined approach to cost and inventory control.

• Old Navy’s momentum: Old Navy delivered standout results driven by trend-right products in categories like denim and activewear, as well as successful partnerships such as the Jingle Jammies collection with Disney and the first designer collaboration with Anna Sui. These initiatives broadened Old Navy’s appeal across income cohorts and age groups.
• Gap brand revitalization: The Gap brand achieved its eighth consecutive quarter of positive comparable sales, fueled by campaigns like Better in Denim and collaborations with cultural figures such as Cat’s Eye and Sandy Liang. These efforts boosted engagement, attracted Gen Z shoppers, and drove double-digit growth in key categories like denim.
• Banana Republic progress: The Banana Republic segment showed meaningful improvement, with men’s fashion and women’s product refinement resonating with customers and driving comparable sales growth. Refreshed campaigns and store updates contributed to renewed brand affinity.
• Athleta reset underway: Athleta experienced a decline in sales, but new leadership has begun a strategic reset focused on long-term brand positioning, assortment curation, and inventory alignment to demand. Management signaled that the turnaround will be gradual, with early steps focused on foundational improvements.
• Supply chain and automation: Gap invested in automation and artificial intelligence (AI) technologies throughout its fulfillment network, increasing productivity and enabling flexibility in meeting consumer demand. This contributed to a more efficient supply chain and supported the company’s efforts to offset tariff pressures on margins.

Drivers of Future Performance

Gap’s forward guidance centers on continued brand momentum, ongoing cost discipline, and targeted investments in growth categories despite persistent headwinds from tariffs and macro uncertainty.

• Brand and category expansion: Management aims to build on the strength of core brands by expanding into new categories, particularly beauty, and deepening partnerships and product collaborations that have proven successful in attracting new and younger customers. These initiatives are expected to drive incremental sales and enhance customer loyalty.
• Tariff mitigation and pricing discipline: The company will continue adjusting sourcing and assortment strategies to offset tariff impacts, while maintaining a careful approach to pricing. Management cautioned that while pricing can support average unit retail (AUR) growth, maintaining value for consumers remains critical. The majority of tariff mitigation in 2026 is expected to come from supply chain and assortment adjustments, with targeted pricing as a supplementary measure.
• Operational rigor and cost savings: Gap is committed to ongoing cost savings efforts, targeting $150 million in operational efficiencies this year. A portion of these savings will be reinvested in growth projects, while the remainder will help offset inflation and support margin stability. The company’s flexible inventory approach is designed to quickly adapt to shifts in consumer demand.

Catalysts in Upcoming Quarters

Looking ahead, the StockStory team will be monitoring (1) the success of new product launches and partnerships, especially as Old Navy expands into beauty and Gap continues collaboration-driven marketing, (2) the pace of recovery and repositioning at Athleta under new leadership, and (3) the effectiveness of ongoing tariff mitigation and cost savings initiatives in supporting margins. Execution against these priorities will be key to sustaining momentum.

Gap currently trades at $24.33, up from $23.03 just before the earnings. At this price, is it a buy or sell? See for yourself in our full research report (it’s free for active Edge members).

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