Investors “Spooked” After Gap Tariff Warning

Gap Inc. shares plunged in premarket trading after the retailer warned in its earnings release of a potential $300 million hit from tariffs.

The retailer sources much of its clothing from third-party manufacturers, primarily located across Asia—regions heavily impacted by the trade war—while selling the majority of its merchandise through U.S. stores. The warning comes amid a 90-day pause in the US-China trade war as both countries engage in bilateral talks to craft a trade deal. 

“If these tariff rates remain, they could result in a gross estimated incremental cost of approximately $250 million to $300 million,” Gap wrote in an earnings release. It based its guidance on tariffs of 30% on most imports from China and 10% on most other countries. 

Gap maintained its guidance from the previous quarter, noting that it has strategies to mitigate more than half of that cost: 

“The company currently has strategies to mitigate more than half of that amount. After considering these mitigation strategies, the company estimates a remaining net impact of about $100 million to $150 million to fiscal 2025 operating income, primarily weighted to the back half of the year.” 

Neil Saunders, managing director of GlobalData, told Bloomberg that the tariff warning “spooked investors.”

Shares tumbled as much as 16% in premarket trading in New York, nearly wiping out all year-to-date gains of 18% as of the close Thursday. 

The tariff issue aside, Gap reported a solid first quarter across its brands, except for Athleta and Banana Republic:

1. Total comparable sales +2%, Bloomberg estimate +1.59%

2. Gap and Old Navy both grew market share across all income groups, marking their 8th and 9th straight quarters of gains, respectively.

3. Old Navy posted +3% comps, driven by strong full-price sell-through and a successful relaunch of its activewear line.

4. Gap brand delivered +5% comps, with strong demand in core categories (fleece, sweaters, sleepwear) and solid traction from new collaborations.

5. Banana Republic comps were roughly flat, with stabilization continuing as turnaround efforts in product and pricing gain traction.

6. Athleta remains challenged, with comps down 8% due to weak product engagement and a longer recovery timeline.

7. Operating margins expanded, supported by ROD (reduction of discounting) leverage and tight cost control, while merchandise margins remained flat year-over-year.

For the second quarter, Gap expects sales to remain flat compared to the year-ago period, in line with Wall Street analysts’ expectations. The company expects minimal tariff-related impacts in the current quarter. 

Wall Street analysts weighed in on Gap with their first takes… 

Citi analyst Paul Lejuez, who maintains a “Buy” rating on Gap, lowered his target to $30 from $33 due to the retailer’s higher tariff burden. 

Bloomberg Intelligence analyst Mary Ross Gilbert commented, “Gap’s cautious 2Q outlook and tariff-driven margin pressure may leave room for upside,” adding, “The expected $100-$150 million profit impact from tariffs (about 65-102 bps after mitigation and $250-$300 million before) appears manageable and could be offset further.” 

JPMorgan analyst Matthew Boss, who has an “Overweight” rating and a $29 price target, called this morning’s stock selloff a “buying opportunity,” emphasizing that strong brands “can win in any market.” 

Goldman analyst Brooke Roach raised her 12-month price target to $28 from $25. 

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