Gap (GAP) 2026 財年第二季法說會：上調每股盈餘展望

Gap Inc. (NYSE: GAP) 在 2026 財年第二季財報電話會議中公布各品牌業績喜憂參半。全公司銷售額下降，但毛利率紀律與股票回購支撐了更高的全年調整後每股盈餘 (EPS) 展望。

重點提要

• 第二季淨銷售額年減 2% 至 37 億美元，同店銷售額則下降 1%。
• Gap 品牌同店銷售額成長 10%，為連續第 11 個季度實現正成長。Old Navy 同店銷售額下降 4%，Banana Republic 成長 3%，Athleta 下降 12%。
• 受益於商品利潤率提升 80 個基點（包含約 30 個基點來自關稅緩解措施），調整後毛利率增加 20 個基點至 41.4%。
• 調整後營業利益率下降 70 個基點至 7.1%。調整後 EPS 為 0.52 美元，去年同期為 0.57 美元。
• 管理層收窄了 2026 財年淨銷售額成長展望至 1%–1.5%，但調升調整後營業利益率預測至 7.4%–7.6%，並調升調整後 EPS 預測至 2.35–2.45 美元。
• Gap Inc. 年初至今已回購超過 6 億美元的股票，其中第二季另外回購了 2 億美元。目前授權額度中仍剩餘約 4 億美元。

關鍵財務數據

第二季及 2026 財年調整後利潤率數據排除與《國際緊急經濟權力法》下預期淨關稅退還相關的銷貨成本調整。調整後 EPS 亦排除了相關利息影響。全年調整後數據排除了第一季的淨法律和解利益及抵銷之慈善捐款。

業務與營運表現

Gap 品牌

Gap 仍是品牌組合的主要成長引擎。在牛仔、羊毛服飾以及童裝與嬰兒用品的支撐下，淨銷售額成長 9%，同店銷售額成長 10%。女裝表現領先本季，男裝亦取得穩健成績。

管理層指出，該品牌擴大了市場佔有率與客戶群，並減少折扣活動。與 Hailey Bieber 合作的牛仔系列迅速售罄，並帶動了主打產品以外的門市與網站人流。Gap 還重新推出了香氛系列，並計劃在 9 月的時裝週期間推出包款。

門市改裝計畫按預定進度推進。Gap Inc. 預計今年將完成約 35 家門市改裝，在年底前將 Gap 約四分之一的北美專賣店轉型為最新店型。

Old Navy

Old Navy 的淨銷售額與同店銷售額均下降 4%。管理層將同店銷售額約 3 個百分點的壓力歸因於女性夏季品項，特別是洋裝、短褲與泳裝，由於商品搭配與定價策略削弱了產品的價值主張。此外，行銷活動帶來的客流量亦低於預期。

公司表示，大部分面臨挑戰的季節性庫存已在第三季開始前清空。隨著牛仔、運動服飾、毛衣與針織衫在產品組合中的比重提升，8 月的表現有所改善。據管理層稱，由 Cardi B 和 MrBeast 主打的行銷活動也帶動了更好的客流量與轉換率。

Old Navy 正在擴大幾項新倡議，包括 Old Navy Sport、約 40 家運動服飾店中店、全國範圍推廣 Old Navy Beauty Co，以及透過 Fanatics 銷售授權運動商品。

Michael Francis 將於 11 月 2 日起出任 Old Navy 品牌總裁兼執行長。管理層將此變動描述為既定的過渡安排，並表示 Francis 已為下半年的產品敘事與行銷計畫做出貢獻。

Banana Republic

Banana Republic 淨銷售額成長 1%，同店銷售額成長 3%，實現連續第五個季度正同店銷售額成長。男裝與女裝表現均衡，外套、毛衣、牛仔與亞麻產品表現強勁。

Donald Kohler 於 7 月加入擔任 Banana Republic 總裁兼執行長。管理層預期他在商品企劃、營運與品牌建設方面的經驗將支持該品牌下一階段的發展。

Athleta

Athleta 淨銷售額與同店銷售額均下降 12%。公司在測試包括 Journey Travel 系列在內的新產品時，繼續限制庫存與行銷投資。

管理層表示，保守的庫存策略短期內可能會限制營收成長，但在品牌重建客戶參與度、產品新鮮感與品牌敘事期間，能夠提高庫存效率並支撐獲利能力。

管理層指引

按品牌區分，管理層預估 Gap 2026 財年的同店銷售額將成長高個位數至低雙位數。Banana Republic 的同店銷售額預計成長低個位數。Old Navy 的同店銷售額預計持平至下降 1%，且下半年將逐季改善。Athleta 的全年趨勢預計將與上半年相似。

對於第三季，管理層預計淨銷售額成長 1.5%–2.5%，其中同店銷售額比淨銷售額落後約 50 個基點。目前的營運表現接近該預測區間的下限。Old Navy 的同店銷售額預計大致持平至下降 1%。

第三季毛利率預計將比去年同期的 42.4% 上升 25–75 個基點。管理層預估關稅將提供約 150 個基點的助益，但部分會被更高的燃料成本以及對 Old Navy 定價與產品組合的投資所抵銷。

風險與觀察重點

• 在夏季商品組合表現不佳之後，Old Navy 的復甦將取決於秋季產品改善、定價、行銷成效以及客流量。
• Athleta 仍處於轉型初期，管理層將庫存紀律置於短期銷售改善之上。
• 展望仍容易受到美國關稅政策及能源價格潛在波動的影響。
• 由於與地緣政治動盪相關的在途庫存增加，庫存件數成長了 4%。
• 隨著關店放緩、新店恢復開設，加上門市改裝、技術、AI 與供應鏈能力的投資帶動折舊增加，預計全年租金、門市費用及折舊將造成約 50 個基點的去槓桿影響（費用率上升）。
• 在會議召開時，第三季的銷售高峰期尚未到來，各品牌的最終表現仍有變化空間。

分析師問答焦點

Old Navy 趨於穩定：管理層表示，夏季季節性因素帶來的約 3 個百分點逆風已大體結束。隨著秋季商品到貨，加上新行銷活動帶來更好的客流量與轉換率，8 月的趨勢有所改善。

品牌組合利潤率支撐：Gap、Banana Republic 和 Athleta 強勁的利潤率提供了清空 Old Navy 季節性庫存的空間。公司還將第 122 條款關稅收益的大約一半（約 4,000 萬美元）用於 Old Navy 下半年的價值與促銷定位，並在第三和第四季之間相對均勻地分配。

資本回報：年初至今超過 6 億美元的股票回購減少了流通股數，並為調升後的調整後 EPS 指引貢獻了 0.05 美元。管理層與董事會將繼續評估在剩餘 4 億美元授權額度下的進一步資本回報。

美妝與配件：管理層預計這些品項在 2026 財年不會產生顯著的財務貢獻。公司將 Gap 香氛、Gap 包款及 Old Navy Beauty Co 視為長期增量成長與客流量的來源。

庫存管理：Old Navy 在第三季前清空了大部分夏季季節性商品。Athleta 在評估新產品需求時保持謹慎採購，而 Gap 則在補貨銷量較好的商品以支持需求。

完整財報電話會議逐字稿

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完整財報電話會議逐字稿

管理層陳述

Operator

Good afternoon, ladies and gentlemen. I would like to welcome everyone to the Gap Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions]

I would now like to introduce your host, Shirley Martin, Senior Director of Investor Relations.

Shirley Martin

Good afternoon, everyone. Welcome to Gap Inc.'s Second Quarter Fiscal 2026 Earnings Conference Call.

Before we begin, I'd like to remind you that the information made available on this conference call contains forward-looking statements that are subject to risks that could cause our actual results to be materially different.

For information on factors that could cause our actual results to differ materially from any forward-looking statements, please refer to the cautionary statements contained in our latest earnings release. The risk factors described in the company's annual report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2026, and other filings with the Securities and Exchange Commission all of which are available on gapinc.com.

These forward-looking statements are based on information as of today, August 27, 2026, and we assume no obligation to publicly update or revise our forward-looking statements. Our latest earnings release and the accompanying materials available on gapinc.com also include descriptions and were available reconciliations of financial measures not consistent with generally accepted accounting principles. All mark share data referenced today will be from Sircana's U.S. apparel consumer service for the 12 months ending July 2026, unless otherwise stated.

Joining me on the call today are our Chief Executive Officer, Richard Dickson; and Chief Financial Officer, Katrina O'Connell.

With that, I'll turn the call over to Richard.

Richard Dickson

Thanks, Shirley, and good afternoon, everyone. In the second quarter, while the company exceeded our profit expectations, we delivered a net sales decline of 2% with mixed performance on the top line across the portfolio.

While not the revenue outcome we wanted continued operational and financial rigor contributed to gross margin strength.

We also maintained market share, reflecting the continued resonance of our brand portfolio. The Gap brand delivered another exceptional quarter with comparable sales increasing 10% and Banana Republic continued to build momentum, posting its fifth consecutive quarter of positive comps. Athleta's top line remained pressured, though we saw encouraging improvements in inventory productivity. At Old Navy, as we previewed on last quarter's call, seasonal categories continued to weigh on performance.

While we took actions to address this as the quarter progressed, we also experienced a slowdown in traffic, which led to a modest miss versus our expectations.

While this is disappointing, I have confidence in our plans to improve performance in the second half. Over the past quarter, Katrina and I have been deeply involved with the Old Navy team in conducting a thorough review of the business. We have a clear understanding of where our execution fell short and have moved quickly to strengthen our plans, the details of which I will get into in a few minutes. Based on August trends, we are also encouraged by the improvement we are seeing, and we're focused on delivering for the second half.

Beyond our near-term priorities, we continue to make long-term investments to advance our next phase of growth. We continue to expand beauty and accessories while building our fashiontaiment and technology platforms to deepen customer engagement, strengthen our brands and enhance our operations.

We also demonstrated our commitment to shareholder returns through our dividend and meaningful share repurchases in the quarter, reflecting both the strength of our balance sheet and our confidence in the long-term opportunity.

As we factor in our second quarter performance, we are narrowing our full year revenue outlook. At the same time, we are raising our margin and EPS outlook, as Katrina will share shortly. We are confident in the road map we have put in place for the second half and remain focused on disciplined execution and delivering further improvement.

Turning now to our detailed second quarter results by brand, starting with Old Navy. In the second quarter, Old Navy's comparable sales declined 4%. As we previewed last quarter, we expected the women's summer seasonal assortment to pressure performance, and that played out largely as anticipated, accounting for approximately 3 points of the comp pressure in the quarter. In particular, we experienced declines in dresses, shorts and swim, where we made some assortment and pricing decisions that impacted our value equation. What we did not anticipate was the degree to which our marketing would fall short in driving traffic. We are not satisfied with this result and have responded quickly. As we move into the third quarter the headwind from summer categories becomes much less significant. This gives us a clear runway for improvement as key categories like denim, active, sweaters and knits drive the business.

Additionally, as we sharpen fashion content and pricing, we believe our fall assortment will provide an improved value equation.

In denim, we are solidly positioned as the third largest denim brand in the country with great quality denim for the whole family at highly attractive price points, we are building Old Navy as a denim destination. Following strong first half performance, denim will grow in importance during the second half as we build on the momentum we are seeing in newer silhouettes like low rise and baggy while introducing more fashion and choice, all at great value.

In knits, legacy franchises remain healthy while we chase into untapped growth in newer franchises like Hug and Heavy Weight.

In active, Old Navy is the fifth largest brand in the country. With the success we've had and continued innovation, this fall, we are amplifying our presence in the category with the introduction of Old Navy Sport, beginning with an elevated merchandising experience, including approximately 40 shop-in-shops in select stores and storytelling centered on technical innovation and style at an incredible value. Old Navy Sport will become Old Navy's active brand.

In beauty, building on our successful pilot last fall, this week, we launched our Old Navy Beauty Co collection nationwide expanding Old Navy into a destination for everyday essentials from style to beauty. And next month, we are expanding our partnership with Fanatics bringing our first exclusive collection of licensed sports merchandise to customers at Old Navy's Signature value, enabling us to capitalize on key moments in the sports calendar beginning with football season.

In addition to product, we have rewired our marketing strategy to improve traffic trends. Our fall denim campaign featuring music artists and television personality Cardi B, launched earlier this month and is off to a good start, driving improvement in traffic, building on its success this week, we launched Carty's Carty, extending the reach and relevance of the campaign into knits. In addition, as we build excitement and momentum for back-to-school, we have partnered with leading digital creator, Mr. Beast, on a multipart content series highlighting the incredible style, expression and value in Old Navy's back-to-school collection.

With improved execution in August, we have seen the business pick up reinforcing our confidence in the actions we are taking. We are clear on the path forward, and we believe we can drive stronger results from here.

As we execute on our fall plans, we are separately announcing this afternoon that we are advancing a planned leadership transition with the appointment of Michael Francis as Old Navy's new Brand President and CEO, succeeding Io Barbado, effective Monday, November 2. Io is working closely with Michael in an advisory capacity to ensure a smooth transition. I want to thank Io for his leadership and contributions to Old Navy in strengthening the foundation of the brand, scaling our strategic categories and positioning the business for a new phase of growth.

Since the beginning of our transformation, Old Navy has grown its annual revenue by nearly $0.5 billion, further strengthening its position as the #1 specialty apparel brand and retailer in the U.S.

As we look ahead to the brand's next phase, Michael's deep experience in customer-centric brand building and track record of strong commercial execution will be instrumental in unlocking the brand's full potential and I am confident that now is the right time for him to step into this role. Michael has a proven ability to connect creativity, culture and commerce in ways that will energize the business. I've seen this firsthand as we have worked closely together to develop our plans for the second half and position Old Navy to capture the significant opportunity we see ahead.

Now moving on to Gap. Gap delivered another excellent quarter. Comparable sales increased 10%, marking its 11th consecutive quarter of positive comps.

As we continue to strengthen product and storytelling through big ideas and culturally relevant narratives, we are deepening customer engagement and further strengthening the brand. That momentum is reflected in the continued expansion of our customer file and yet another quarter of lower discounting. We also posted another quarter of market share gains. Importantly, GAP's momentum continues to be broad-based. Women's led performance in the quarter, while men's also delivered solid results. Kids and baby also accelerated as customers continue to respond positively to our more elevated product aesthetic.

By category, denim and fleece once again drove the business, underscoring the continued strength of our destination categories.

Gap continues to solidify its cultural relevance with customers, connecting fashion and creativity through compelling collaborations and partnerships. In the second quarter, we teamed up with Hailey Bieber, 1 of fashion's most influential tastemakers, to reimagine 2 of GAP's signature denim silhouettes for a new generation. The Hailey Jean sold out quickly while driving strong traffic and a meaningful halo across the broader business. This was a great start, and there's more to come.

As we look ahead, we are building on our success in elevating core categories while also now investing in growth accelerators to expand Gap's relevance across more aspects of consumers' lifestyles. We ended the second quarter relaunching our iconic Gap fragrance line. Early customer response has been encouraging, reinforcing both our heritage and our confidence in the long-term opportunity in beauty. And we are expanding into Gap accessories, beginning with bags, launching with Fashion Week in September.

Marketing continues to resonate playing into Gap's heritage and music with the latest release of Denim On My Own, featuring musical artist, Malcolm Todd in Gap denim in a reinterpretation of Robin's iconic Dancing On My Own.

In addition, we continue to elevate the customer experience. Our store remodel program remains on track with upgraded stores outperforming the rest of the fleet. We expect to complete approximately 35 remodels this year bringing roughly 1/4 of our North America specialty fleet into our latest concept by year-end.

I'm incredibly proud of the Gap team and what they continue to accomplish. Quarter after quarter, they have demonstrated that when great product is paired with compelling storytelling and disciplined execution, it creates a powerful flywheel of customer engagement and brand momentum.

As we enter the third quarter, we have an exciting pipeline of product innovation, culturally relevant collaborations and brand activations that position Gap to continue its momentum.

Moving on to Banana Republic. Banana Republic delivered another quarter of progress with comparable sales increasing 3%, marking the brand's fifth consecutive quarter of positive comparable sales growth. The quarter reflected broad-based strength across both the men's and women's businesses as customers responded positively with categories like outerwear, sweaters and denim as well as our linen fabrications performing well.

Throughout the quarter, Banana Republic continued to celebrate its heritage as a brand for the modern explorer through elevated product and travel inspired storytelling. Through our Portugal series and partnership with National Geographic host, Anthony Perowski, we reinforced linen as the season's hero fabric and our curated archive drop successfully introduced Banana Republic's heritage to a younger customer through iconic styles.

Banana Republic is demonstrating continued progress while becoming increasingly distinctive in the marketplace, upgraded stores like Century City and Tyson's Corner are delivering a better shopping experience, resulting in customers spending more when they shop with us.

As Banana Republic enters its next chapter, we were excited to welcome Donald Kohler as the brand's new President and CEO in July. Since joining, Donald has hit the ground running and is a combination of operational excellence, merchandising expertise and brand building instincts gives me great confidence and opportunities ahead. Under his leadership, we believe Banana Republic is well positioned to build on its progress.

Now turning to Athleta. Athleta's performance in the second quarter remained challenged with comparable sales declining 12%. During the quarter, we proactively managed inventory tightly while testing and learning selectively with new product launches. This resulted in better inventory productivity with early signs of customer acceptance of newer products like the Journey Travel collection launched last quarter.

As we continue to evolve our assortment, our priorities are clear. We are increasing newness, reducing reliance on promotions and seeking to rebuild customer engagement through better product and stronger storytelling. We have also strengthened the organization with new talent across digital and merchandising to improve execution over time.

With our turnaround efforts still in the early stages, we are continuing to take a measured and disciplined approach to inventory and marketing investments as we continue to assess customer response in the second half.

While this approach may limit top line improvement in the near term, we believe it is important to rebuild the business on a stronger foundation for sustainable growth.

Before I turn the call over to Katrina, with August marking 3 years since I took on the role of CEO at Gap Inc., I want to take a moment to reflect on our transformation journey so far. We are pleased with the progress we've made, while recognizing there is more work ahead. We made a choice to perform while we transform. And the metrics that matter reinforce that we have made fundamental improvements in the business. We are on track to deliver our third year of positive sales growth, led by our focus on strategic categories. As a portfolio, we have gained meaningful market share. We are delivering some of our strongest gross margins in 25 years, and we have significantly improved the strength of our balance sheet while returning meaningful cash to our shareholders.

I want to thank our team for the progress we made and their commitment to becoming a high-performing company. We built a stronger foundation with greater financial and operational rigor, but we know there is more to unlock. And we have conviction in our ability to do so by executing with greater consistency, agility and discipline as we continue our transformation journey.

With that, I'll turn the call over to Katrina to walk you through our financial results and updated outlook for fiscal 2026.

Katrina O'Connell

Thank you, Richard, and thanks, everyone, for joining us this afternoon. In the second quarter, we remained focused on performing while we transform. While revenue results were mixed across brands, at the company level, we continue to deliver across several other key metrics.

We achieved a strong gross margin result led by disciplined pricing and inventory management. We maintained SG&A rigor while balancing investments in growth accelerators and capabilities to fuel our future. And with the strength of our balance sheet, we opportunistically accelerated share repurchases while maintaining a healthy dividend and continuing to invest capital to support our business.

While Old Navy underperformed, we've clearly identified the drivers and have taken targeted action to strengthen execution in the second half. Quarter-to-date, we are encouraged by the improvement we're seeing in the business, which reinforces that we are on the right track. At the same time, we remain highly confident in Gap's momentum in Banana Republic's consistency, while we continue rebuilding Athleta.

As we factor in our second quarter performance, we are narrowing our full year revenue outlook, with net sales growth now expected in the range of 1% to 1.5%. At the same time, we are raising our outlook for adjusted operating margin and earnings per share, the details of which I will share shortly.

As outlined in this afternoon's earnings release, our second quarter results and full year 2026 outlook for adjusted gross margin and operating margin exclude a cost of goods sold adjustment tied to an expected net recovery of tariffs previously paid under the International Emergency Economic Powers Act. Our adjusted earnings per share outlook also excludes the related interest impact.

Separately, as previously discussed, our full year adjusted SG&A, operating profit and earnings per share outlook exclude the net gain from a legal settlement and the offsetting charitable donation made in the first quarter.

Now on to our results. Net sales of $3.7 billion decreased 2% year-over-year with comparable sales down 1%. As I previewed last quarter, the spread between net sales and comparable sales included the impact of lapping revenue recognized last year related to the structure of our credit card agreement.

By brand, Gap delivered another outstanding quarter. Net sales up 9%, comparable sales up 10%, driven by culturally relevant storytelling in destination categories like denim, fleece and kids and baby.

Old Navy net sales and comparable sales declined 4%. As expected softness in the women's seasonal assortment was compounded by traffic slowing as the quarter progressed.

Banana Republic had a solid quarter. Net sales up 1%, comparable sales up 3%, with balanced performance across men's and women's, supported by stronger marketing and brand storytelling.

Athleta net sales and comparable sales declined 12%, and we remain focused on disciplined execution as we rebuild the brand profitably.

AUR again grew across our brands with Gap brand also delivering positive traffic and unit growth, providing a clear example of the broad-based strength the reinvigoration playbook can deliver.

Let's continue to the balance of the P&L. Reported gross margin for the quarter was 52.8%, adjusted gross margin of 41.4% increased 20 basis points versus last year. Adjusted merchandise margin expanded 80 basis points, driven primarily by the Gap brand with a partial offset from Old Navy where we were more promotional. As previewed merchandise margins included approximately 30 basis points of benefit associated with our tariff mitigation actions.

We also experienced a slight headwind from the credit card dynamic and higher fuel costs. ROD deleveraged 60 basis points better than expected with timing of certain occupancy expenses shifting into the third quarter.

SG&A for the quarter was $1.3 billion or 34.3% of net sales, deleveraging 90 basis points. As previewed, the deleverage to last year was driven by the timing of investments in growth accelerators and capabilities.

Second quarter reported operating margin was 18.5%. The adjusted operating margin was 7.1%, down 70 basis points compared to last year as gross margin expansion was primarily offset by the timing of investments, as I just outlined.

Reported earnings per share were $1.38. Adjusted earnings per share were $0.52 versus last year's earnings per share of $0.57.

Before I move on to the details of our cash flow and balance sheet, I would like to reiterate our capital allocation framework. Our approach remains disciplined, leveraging the strength of our balance sheet and robust cash profile to enhance long-term shareholder value.

Our first priority remains investing in the business through high returning capital investments. Second quarter capital expenditures were $154 million, bringing year-to-date investments to $289 million. We continue to expect approximately $650 million for the full year, primarily for new stores and remodels at Gap and Old Navy along with technology and supply chain investments.

Our second priority is to pay a growing dividend. We paid $62 million in dividends in the second quarter and the Board has approved a third quarter dividend of $0.175 per share.

And our third priority is share repurchases to drive earnings accretion. In addition to completing the previously announced accelerated share repurchase program, we repurchased an additional $200 million of stock in the open market in the quarter, bringing year-to-date repurchases to over $600 million or 26 million shares. Approximately $400 million remains under our current authorization.

We ended the quarter with $2.5 billion of cash, cash equivalents and short-term investments on our balance sheet, up slightly to last year. Year-to-date net cash from operating activities was $550 million, and year-to-date free cash flow was $261 million.

Inventory discipline remains a priority. Quarter end inventory at cost was flat year-over-year. On a unit basis, inventory was up 4%, reflecting higher in-transit inventory largely tied to geopolitical disruptions.

Now let me turn to our outlook. Our outlook reflects continued disciplined execution as we work towards a third consecutive year of profitable sales growth. As always, we're taking a balanced view factoring in what we currently see in the consumer and macro environment, which is largely unchanged. And while remaining mindful of potential volatility ahead in energy prices and U.S. tariffs.

Before I get into the details, I want to provide an update on our tariff assumptions. Let me unpack the moving pieces around tariff rates, and then I will walk you through how we are factoring this into our gross margin outlook for the year, which remains largely unchanged.

Our prior outlook in May assumed 10% tariff rate from February 24 through July 24, under Section 122 before returning to a high-teens tariff rate for the balance of the year. Following the Section 301 announcement on July 23, 2026, we are now extending that 10% assumption through the end of August, which provides approximately $15 million of incremental net tariff relief to the year, which will be realized primarily in the fourth quarter. If the current rate of 10% holds through the end of the third quarter, we estimate it would provide an additional $35 million benefit to the year.

Turning to the specifics of our outlook for fiscal 2026. Starting with revenue. As noted earlier, we now expect full year net sales growth of 1% to 1.5% and with comparable sales roughly in line. By brand, at Old Navy as a result of a slightly more challenging second quarter, we now assume comparable sales are flat to down 1%. And with sequential improvement in the second half as our targeted actions take hold. With the momentum we are seeing at Gap brand, we now expect comp growth in the high single to low double-digit range. Banana Republic is expected to post another year of growth with comps in the low single digits. And at Athleta, we are taking a measured approach to inventory buys as we introduce more newness in the back half, allowing us the flexibility to read and react to new product receptivity. While the teams are striving to do better, our outlook for Athleta assumes full year trends remain similar to the first half.

Turning to gross margin. We are raising our adjusted gross margin outlook as we incorporate incremental tariff relief from Section 301 as referenced earlier. We now assume our adjusted gross margin will be up slightly versus the prior year. Tariffs are now expected to be a slight benefit incorporating our largely unchanged view of the net impact of IEEFA tariffs, the Section 122 benefit that we have reserved and the more recent Section 301 benefit of approximately 10 basis points that we are flowing through.

Outside of this, our margin outlook is unchanged. Merchandise margins are expected to expand year-over-year, reflecting a balanced plan of higher AURs through better sell-throughs and lower discounting, while ROD is expected to deleverage approximately 50 basis points.

Moving on to SG&A. We remain committed to delivering $150 million in cost savings this year as part of our ongoing push for efficiency. Part of that will offset inflation with the remainder funding growth initiatives. Consistent with prior guidance, we expect full year adjusted SG&A as a percentage of sales to be roughly flat year-over-year with leverage in the second half as we lap last year's spending on strategic initiatives and elevated incentive compensation, which was weighted toward the third and more heavily fourth quarters last year.

Taking this all together, we're pleased to be raising our adjusted operating margin outlook slightly to 7.4% to 7.6% for the full year versus 7.3% last year, reflecting continued rigor and discipline across the P&L in addition to tariff benefits related to Section 301.

Adjusted interest income is now expected to be approximately $20 million skewed to the fourth quarter, given the expected tariff refund, and we expect a tax rate in the range of 25% to 26%.

Adjusted EPS is now expected to be $2.35 to $2.45, up 10% to 15% versus last year, an increase from our prior outlook, reflecting our improved gross margin outlook and a lower weighted average share count of 367 million shares following second quarter repurchase activity.

Now let me turn to our outlook for the third quarter of fiscal 2026. The quarter is off to a good start, supported by a sequential improvement at Old Navy. With this in mind, we expect net sales in the third quarter to increase 1.5% to 2.5% year-over-year with comparable sales underpacing net sales by approximately 50 basis points. Our current trend supports the low end of our outlook, but with a range of outcomes by brand that could deliver better. This assumes continued strength at Gap and growth at Banana Republic with Athleta trending similar to our first half performance.

For Old Navy, we expect a comp range of roughly flat to down 1%. Current trends are in line with the range, reflecting meaningful sequential improvement to our second quarter performance as the impact of the challenged summer seasonal product abates and new fall marketing and product resonates more strongly.

With peak selling periods still ahead and as newer initiatives like Old Navy Sport, beauty and Fanatics launch and build through the quarter, we see the potential for further improvement. We expect the third quarter gross margin to be up 25 to 75 basis points compared to last year's gross margin of 42.4%. Tariffs are expected to be an approximately 150 basis point benefit with 50 basis points related to lower tariff rates under Section 122 and the balance driven by our mitigation strategies. Consistent with prior expectations, half of the relief from Section 122 is expected to fund higher fuel costs.

With regards to the balance of our merchandise margin profile, we expect the margin to be flat to down modestly as we leverage margin strength in Gap brand in addition to the remaining half of the Section 122 benefit to make assortment and pricing adjustments at Old Navy to strengthen second half performance. We believe the brand's fall assortment now better reflects the category mix, fashion balance and value proposition that our customers look to us for which is supporting our confidence in a sequential recovery in the second half. ROD is expected to deleverage approximately 60 basis points.

Last, we are planning for SG&A as a percentage of net sales to leverage slightly as we continue to exercise expense discipline while lapping slightly higher third quarter incentive compensation last year.

In closing, our outlook reflects our best assessment of the business today, and we are focused on disciplined execution. With peak selling periods still ahead and exciting new initiatives building, we're driving for continued improvement in the second half. Across the organization, our teams are operating with urgency and a clear determination to win. I remain confident in our strategy and in our ability to deliver sustainable value for our shareholders.

With that, we'll open the line for questions. Operator?

Operator

[Operator Instructions] Your first question comes from the line of Dana Telsey with Telsey Group.

分析師問答

Dana Telsey

Certainly good to hear about the continued double-digit increase at the Gap brand. On the Old Navy brand where it seems like you've been speedily making enhancements to drive the business, what are the markers that you're looking for to show improvement? Is the women's seasonal? When will you -- when will that category? Are you out of the inventory? Is there still more? And with the lower traffic that you mentioned in the stores, marketing activations, given what you do with the Gap brand, how are you seeing it differently than in the past?

Richard Dickson

Thank you, Dana, and good to hear you. First of all, we were excited, as you can imagine, with another standout quarter at Gap, delivering double-digit comps as well as the 11th consecutive quarter of positive comp growth is a really great indication that the playbook is being executed incredibly well, and we're gaining momentum.

As it relates to Old Navy, we just didn't execute well on our seasonal assortment. Sales have improved in August as we've set fall product and the seasonal categories are behind us. So it is reinforcing that we're on the right track. When we double-click into Old Navy, we're entering into the third quarter with seasonal product behind us. And the impact that we have in that context, denim, active, sweaters and knits become much more meaningful contributors, denim was an area of continued strength in the second quarter, and we've been building on this with more fits and fashion at great value.

Now in the context of marketing, as the second quarter progressed, the summer marketing was not generating the traffic that we expected. And ultimately, with those learnings, we've rewired our fall marketing campaigns to ensure that we're more connected to our top product ideas. August is already demonstrating really significant improvement. You could see our Cardi B. campaign right now is our most viewed campaign in Old Navy's history. But more importantly, we're seeing this translate into improved traffic, strong conversion in women's denim. And we're excited with the results. We've also, in relation to traffic, built a parallel campaign with Mr. Beast. He is the #1 YouTuber in the world, over 500 million subscribers for our back-to-school campaign, which is resonating.

So in sum, I'm very encouraged with the improvement that we're seeing in the business in August. And with the strong products and programs in place moving forward, I feel really good about our plans.

Operator

Your next question comes from the line of Alex Straton with Morgan Stanley.

Unknown Analyst

Congrats on a nice quarter. I wanted to focus on profitability. It's very strong even with Old Navy doing that more challenged comp. So can you just talk about how you're able to maintain such strong profitability levels despite this more challenging quarter for Old Navy? Maybe just some detail by brand would be helpful.

Katrina O'Connell

Alex, this is Katrina. I'm happy to take that. So as you noted, we were very pleased to deliver gross margin up 20 basis points year-over-year, and that was higher than the expectation that we had previewed Merchandise margins were up 80 basis points.

Now 30 basis points of that was tariff, and that was largely utilized to fund the fuel headwinds we had in the quarter. But as you say, we were able to really balance the strength of our portfolio, really broad-based strength in gross margin, particularly at Gap, but also at Banana Republic and Athleta to give us the room to do the promotions we needed to do at Old Navy to be able to really successfully clear through the seasonal product. And we've largely gotten that seasonal product behind us. And all of that allowed us to still deliver merch margins up. Within the total margin, as we talked about, ROD deleveraged about 60 basis points. Some of that's timing and some of that is the dynamic we have previewed. So all in all, strong margins.

Now as I think about what gives me confidence heading on as we go. As Richard just previewed, Old Navy is off to a good start. That 3-point headwind from seasonal product is already behind us and showing up in the results, which is showing us that our strategies are starting to take hold, and we're seeing much more improved performance as we head into the third quarter.

Operator

Your next question comes from the line of Matthew Boss with JPMorgan.

Matthew Boss

So Richard, could you speak to the tale of 2 brands between the Gap and Old Navy in the second quarter? And then if you could just elaborate on August. Any change in double-digit strength at the Gap? And maybe just a little more on the time line for stabilization and reacceleration in your view at Old Navy?

Richard Dickson

Sure, Matt. So first, Gap's execution of the playbook just continues to drive exceptional results. And this has really been through compelling product with distinctive cultural relevance storytelling. It's notable. This is our 11th consecutive quarter of positive comps. And as you mentioned, it's our second quarter of double-digit comp growth. We've seen great strength across women's, men's, kids and baby. In particular, we strengthened our market position in kids and baby. We rose to the #4 rank from the #6 rank. We've also gained share and rank in fleece, where we're also now the #6 brand. Even more importantly, our customer file continues to grow. And we've been particularly doing a great job attracting the Gen Z customer, while preserving what we'll call the multi-generational appeal that Gap has. We're gaining strength across categories. I think the partnerships that we're bringing, particularly the 1 with Hailey Bieber most recently was a really strong success. And so as we enter the third quarter, we've got a robust pipeline of product and marketing and we plan on continuing the momentum that the brand has delivered and on track for the rest of the year.

Now Tale of Two Cities, to some extent, but I think it's important recognizing maybe had 6 consecutive quarters of positive comps leading up to this quarter. Certainly, the quarter wasn't necessarily where we wanted it to be. But as I've shared and we've diagnosed, we missed the mark on our summer seasonal assortment, which we also previewed last quarter.

In addition, we've also mentioned that our marketing fell short driving traffic. The good news, as we look in terms of entering the third quarter, we're in a much better place from a product point of view. The impact that we've had on our seasonal categories reduces significantly categories like denim, active sweaters, knits where we have strength become even more meaningful contributors. You could see our current campaign right now if Cardi B. is driving not only the most viewed campaign in Old Navy's history, but we're also seeing it translate again into improved traffic and strong conversion in women's denim. I mentioned the back-to-school campaign. We were off to a great start. We have a great partnership with Mr. Beast, as mentioned as well, it's resonating. So I've been really encouraged with the improvement that I'm seeing in the business into August. And with the strong products and programs that we have in place, I really do feel very good about our plans for the back half.

Operator

Your next question comes from the line of Brooke Roach with Goldman Sachs.

Brooke Roach

Richard, 1 of the items you outlined as a contributor to the Old Navy softness was the need to sharpen pricing. Can you tell us a little bit more about what you've learned here for this customer and the changes that you're making? Is that customer more price elastic or price-sensitive than before?

And then as a follow-up, Katrina, you had talked about $40 million in reserve for pricing last quarter. It sounds like that's getting deployed at the Old Navy brand. How much of that is being used in 3Q versus 4Q? And do you have additional reserve to take further markdown actions should the competitive environment intensify?

Richard Dickson

Okay. Thanks, Brooke. I'll start, and then Katrina can continue. We see value as a perception based on product and pricing. When we deliver the right product at the right price, the customer responds. And we see that in various different places in our business. For example, in denim, the price value equation is extraordinary, and it's showing up in the results. We also see it with Gap as well as Banana Republic in terms of their performance. But in this case with Old Navy, the seasonal categories in the quarter just didn't really deliver the right combination of style, quality and price.

Moving forward, we've made those adjustments. We feel very good about our fall assortment. We see it already resonating and we believe it represents the great value that we're known for and that the customer is reacting to.

So overall, again, consumers are resilient, granted discerning. But when you get the right product at the right price, they show up and it converts.

Katrina O'Connell

And then, Brooke, to answer the balance of your question. So you're absolutely right. We had previewed on the last call that we were holding that $40 million or half the 122 benefit for promotional environment. We are now using that for Old Navy. We went back and looked at the Old Navy assortment for the second half, both looking at the consumer, but also really looking at what we've learned from the front half. And we feel very good that we've made the right changes to the assortment, the category mix, the fashion quotient and the value quotient to allow us to compete well at Old Navy. We've utilized the 122 pretty equally between quarters. But in addition to that, similar to what we just delivered in second quarter, we're also using the strength in lower discounting and better sell-throughs from Gap to be able to use a little bit of that to also deploy towards value at Old Navy. So those 2 levers, the power of our portfolio as well as the 122 benefit are giving us the opportunity to really make sure we have the right assortment at the right value for Old Navy in the second half of the year.

Operator

Your next question comes from the line of Jay Sole with UBS.

Jay Sole

I want to ask about capital allocation. I think you said you bought back $600 million of stock, somewhat surprising in a good way. But you still have $400 million remaining, 2.5 billion on the balance sheet. Might you continue to buy more stock over the course of this fiscal year, how much -- I mean, would there be opportunities to increase the authorization? You talked to the board about that. And just tell us about the timing of when that might play out.

Katrina O'Connell

Yes. Thanks, Jay. As you said, we did repurchase year-to-date $600 million or 26 million shares. Our stated goal was to drive slight earnings accretion. And with our year-to-date repurchases, we've actually driven mid-single-digit accretion, which we think does demonstrate real shareholder value. In the EPS raise that we did, $0.05 of that raise was attributable to the share repurchase we did in second quarter. As you say, we have $400 million outstanding on our current authorization. And as always, we and the Board will continue to evaluate the return of capital to our shareholders just to make sure we're maximizing value.

Operator

Your next question comes from the line of Bob Drbul with BTIG.

Robert Drbul

I was just wondering if you could spend some more time on what you've learned so far with beauty and accessories and just sort of what we should be looking for over the next few quarters with both of those categories and into '27?

Richard Dickson

Yes. Sure, Bob. I mentioned driving our continuous improvement in our core apparel business because that is the basis for how we're able to enable and accelerate long-term accelerators like beauty and accessories. So we're just getting started across these emerging growth categories. Specifically in beauty, we did relaunch our Heritage Gap fragrance collection in July. We had a really strong customer response very familiar fragrances in some cases and introducing them to a new generation.

Looking ahead, we've got some really great, robust marketing and pipeline with other exciting product drops for Gap that we believe will maintain momentum in the category and continue to grow as we move forward. This week, we also rolled out Old Navy Beauty Co nationwide which we also believe will be a traffic driver for Old Navy. It will also create a more engaging experience for customers. We've started with a great private label collection as well as over 30 third-party brands that will create great excitement and again, long-term proposition for growth for the brand.

In accessories, we're starting with Gap bags this fall, which will be unveiled during Fashion Week. We could not be more excited about it. Reed Krakoff, who oversees our accessory creative has done an absolutely terrific job translating Gap's brand ethos into a really distinctive collection. The collection itself features silhouettes that really draw the inspiration from iconic gap products I will reserve more detail on it because we're really excited to unveil it, but it is going to be fresh and very unexpected.

It's early days for both of these categories. So we're not necessarily anticipating any meaningful financial contribution this year, but each represents a meaningful opportunity to drive incremental long-term growth for the company.

Operator

Your next question comes from the line of Lorraine Hutchinson, Bank of America.

Lorraine Maikis

I wanted to follow up on inventory. It sounds like in total, you're happy with level. But I wanted to see if you could drill down for us on Old Navy if you've been able to alter the receipts in the way you wanted. Same question on Athleta. And then on the flip side, if at Gap, you're able to chase into the strong demand?

Katrina O'Connell

Yes. Thanks, Lorraine. So we did end inventory levels flat. Units were up 4. But as I said, that's really in transit, and that's as a result of what's going on in the world. So overall, we really do remain disciplined.

On Old Navy, we were very purposeful about ensuring that we were clearing through the seasonal product to make sure that we were clean as we headed into the third quarter. And we've also, as I said, really relooked at our fall and holiday assortments to make sure that we feel very good about how we're positioned categorically and with the right quality of fashion and value to compete.

As it relates to Athleta, we're largely taking a very conservative approach on inventory at Athleta. What's interesting is that while that's constraining the top line, it's actually really helping us continue to build on their profitability in the near term, while we really read and react, how the customer is reacting to the new fashion product. And so far, that's been quite good. It's just -- we're being very careful about how we buy it in the near term.

And then maybe lastly, at Gap, yes. We are chasing inventory. The team has developed real nimbleness and agility. And I would say a lot of their success is based on their demonstrated ability to really chase into things that are working and drive these double-digit comps that we've been seeing. So we're pleased overall with the way the portfolio has been managing inventory.

Operator

Your next question comes from the line of Mark Altschwager with Baird.

Mark Altschwager

I just wanted to ask a bigger picture on Old Navy. You've given us the seasonal diagnosis and talked about the fixes and you've talked about how Michael helped build the plan for fall. So I take it that the second half doesn't change much here. I guess my question is, if he formally steps in, in November. I guess what changes that? And I guess, what level of confidence do you have that Old Navy is back to a consistent low single-digit comp as we move beyond the fall rather than kind of a flat to down 1 that you're now guiding for this year?

Richard Dickson

Yes. So first off, speaking about the transition. This was a planned and thoughtful transition. Michael's experience aligns really well with the phase that we're entering for Old Navy. He brings incredible vast experience with some of the largest consumer and retail organizations in the world, Target, Walmart, entertainment companies like DreamWorks, operating in highly complex environments. Michael joined us in May, and I've been working very closely with him on our fall plans. He's already had meaningful impact, including sharpening our product storytelling. The marketing execution you see happening right now. He's had a handprint on and obviously, as he gets more and more versed for the second half. He's going to assume the role officially in November, after which Io will move into an advisory role. They're working very closely together to ensure a continuous and smooth transition. And I think in relation to the Old Navy back on track, we're maintaining our approach and our strategy going forward. We have the right playbook, which we've got proven points on. This is the first negative quarter for Old Navy and 11 quarters. And we've diagnosed it. It's a very specific execution issue in relation to our seasonal challenges. So we believe that we've got the right product and programs in the back half, a smooth leadership transition and the right playbook and team, and we will execute with an expectation to win in the back half and excited about our future.

Operator

Your final question will come from the line of Ike Boruchow with Wells Fargo.

Irwin Boruchow

Katrina, a question about the model. When you look at the raw deleverage in the second quarter and then the guide for the back half to deliver 60 basis points in 3Q while you're growing revenue, too, it kind of implies the occupancy dollars per foot are up high single digits. I'm just kind of curious because the store base isn't changing what are these investments? It just looks like there's more fixed cost in the COGS line than there typically has been. So I'm just curious if you could explain what investments are going on, on why that's happening exactly?

Katrina O'Connell

Yes, sure. We have previewed that ROD deleverages this year. It is a new dynamic for us. I think it represents 2 things. First of all, we've largely concluded closing our underperforming stores. The pace of the closures that we were doing when we were closing 350 stores had provided meaningful benefit to ROD. And now we're modestly opening stores. So that does impact the rod line as the closures abate, and we end up with not that road favorability.

Now it does help us on the sales line. I think you're seeing that this quarter, we have a 50 basis point spread. And by the end of the year, there's no spread. And then hopefully, we'll get to an opening, which starts to benefit sales. So that's 1 thing.

The second thing is we've been slowly taking up our capital. And this year, capital is expected to grow $650 million. So there is a step-up in depreciation. These are, honestly, both short-term and long-term investments, openings, remodels, a lot of the technology work that we're doing around AI to be able to build capability and somewhat in our supply chain. So both of those things come together this year to create the deleverage. The model right now for the year is that ROD will leverage on a mid-single-digit sales growth.

Operator

That concludes our question-and-answer session. I will now turn the call back over to Richard Dickson for closing remarks.

Richard Dickson

Thank you, operator. As we look ahead, our conviction in the long-term opportunity across our portfolio remains unchanged. Our teams are focused on disciplined execution to strengthen our performance. We remain committed to building a high-performing house of iconic American brands while delivering long-term value for our shareholders. Thank you for joining us today.

Operator

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.