Gap (GAP)

Clothing and accessories retailer Gap (NYSE:GAP) met Wall Street’s revenue expectations in Q2 CY2025, but sales were flat year on year at $3.73 billion. The company expects next quarter’s revenue to be around $3.91 billion, close to analysts’ estimates. Its GAAP profit of $0.57 per share was 4% above analysts’ consensus estimates.

Company Overview

Operating under the Gap, Old Navy, Banana Republic, and Athleta brands, Gap (NYSE:GAP) is an apparel and accessories retailer selling casual clothing to men, women, and children.

Apparel sales are not driven so much by personal needs but by seasons, trends, and innovation, and over the last few decades, the category has shifted meaningfully online. Retailers that once only had brick-and-mortar stores are responding with omnichannel presences. The online shopping experience continues to improve and retail foot traffic in places like shopping malls continues to stall, so the evolution of clothing sellers marches on.

Retailers offering casual yet trendy apparel for men, women, and children include H&M (OM:HMB), Inditex (BME:ITX) which owns Zara, Abercrombie & Fitch (NYSE:ANF), and American Eagle Outfitters (NYSE:AEO).

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $15.17 billion in revenue over the past 12 months, Gap is one of the larger companies in the consumer retail industry and benefits from a well-known brand that influences purchasing decisions. However, its scale is a double-edged sword because there are only a finite number of places to build new stores, making it harder to find incremental growth. To accelerate sales, Gap likely needs to optimize its pricing or lean into international expansion.

As you can see below, Gap’s revenue declined by 1.3% per year over the last six years (we compare to 2019 to normalize for COVID-19 impacts) despite opening new stores and expanding its reach.

This quarter, Gap’s $3.73 billion of revenue was flat year on year and in line with Wall Street’s estimates. Company management is currently guiding for a 2% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 1.8% over the next 12 months. Although this projection indicates its newer products will spur better top-line performance, it is still below the sector average.

Number of Stores

A retailer’s store count often determines how much revenue it can generate.

Over the last two years, Gap opened new stores quickly, averaging 2.6% annual growth. This was faster than the broader consumer retail sector.

When a retailer opens new stores, it usually means it’s investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.

Note that Gap reports its store count intermittently, so some data points are missing in the chart below.

Same-Store Sales

A company's store base only paints one part of the picture. When demand is high, it makes sense to open more. But when demand is low, it’s prudent to close some locations and use the money in other ways. Same-store sales gives us insight into this topic because it measures organic growth for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year.

Gap’s demand within its existing locations has been relatively stable over the last two years but was below most retailers. On average, the company’s same-store sales have grown by 1.4% per year. This performance suggests it should consider improving its foot traffic and efficiency before expanding its store base.

In the latest quarter, Gap’s same-store sales rose 1% year on year. This performance was more or less in line with its historical levels.

Gap has great unit economics for a retailer, giving it ample room to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an excellent 41% gross margin over the last two years. That means for every $100 in revenue, only $59.00 went towards paying for inventory, transportation, and distribution.

Gap’s gross profit margin came in at 41.2% this quarter, down 1.3 percentage points year on year and missing analysts’ estimates by 1.6%. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

Gap was profitable over the last two years but held back by its large cost base. Its average operating margin of 7% was weak for a consumer retail business. This result is surprising given its high gross margin as a starting point.

On the plus side, Gap’s operating margin rose by 1.3 percentage points over the last year.

This quarter, Gap generated an operating margin profit margin of 7.8%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Gap’s flat EPS over the last six years was weak but better than its 1.3% annualized revenue declines. However, we take this with a grain of salt because its operating margin didn’t improve and it didn’t repurchase its shares, meaning the delta came from reduced interest expenses or taxes.

In Q2, Gap reported EPS of $0.57, up from $0.54 in the same quarter last year. This print beat analysts’ estimates by 4%. Over the next 12 months, Wall Street expects Gap’s full-year EPS of $2.34 to shrink by 14.9%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Gap has shown robust cash profitability, driven by its attractive business model that enables it to reinvest or return capital to investors. The company’s free cash flow margin averaged 6.4% over the last two years, quite impressive for a consumer retail business. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Taking a step back, we can see that Gap’s margin dropped by 2.7 percentage points over the last year. This decrease came from the higher costs associated with opening more stores.

Gap’s free cash flow clocked in at $350 million in Q2, equivalent to a 9.4% margin. The company’s cash profitability regressed as it was 3 percentage points lower than in the same quarter last year, but it’s still above its two-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, leading to short-term swings. Long-term trends trump temporary fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Gap historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7.6%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+.

Gap reported $2.43 billion of cash and $5.59 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.63 billion of EBITDA over the last 12 months, we view Gap’s 1.9× net-debt-to-EBITDA ratio as safe. We also see its $18 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Gap beat analysts’ EPS expectations this quarter. On the other hand, its EBITDA missed and its gross margin fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock traded down 4.8% to $20.63 immediately after reporting.

Updated: November 14, 2025 at 9:44 PM EST

Before investing in or passing on Gap, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

Gap’s business quality ultimately falls short of our standards. To kick things off, its revenue has declined over the last six years. And while its new store openings show it’s growing its brand, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its projected EPS for the next year is lacking.

Gap’s P/E ratio based on the next 12 months is 12x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $24.98 on the company (compared to the current share price of $24.26).