GAP INC (GAP)

Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations.

OUR BUSINESS

We are a house of iconic American brands offering apparel, accessories, and personal care products for men, women, and children under the Old Navy, Gap, Banana Republic, and Athleta brands. Our products are available to customers both in stores and online, through Company-operated and franchise stores, websites, and third-party arrangements. We have Company-operated stores in the United States, Canada, Japan, and Taiwan. We also have franchise agreements to operate Old Navy, Gap, Banana Republic, and Athleta throughout Asia, Australia, Europe, Latin America, the Middle East, and Africa. Under these agreements, third parties operate, or will operate, stores and websites that sell apparel and related products under our brand names. In addition to operating in the specialty, outlet, online, and franchise channels, we use our omni-channel capabilities to bridge the digital world and physical stores. The shopping experience is further enhanced by our omni-channel services, including buy online pick-up in store, order-in-store, and ship-from-store, as well as enhanced mobile-enabled experiences, which allow our customers to shop seamlessly across our brands and channels. Our brands have shared investments in supply chain and information technology, which allows us to optimize efficiency and responsiveness in our operations. Most of the products sold under our brand names are designed by us and manufactured by independent sources globally.

OVERVIEW

Financial results for the first quarter of fiscal 2026 are as follows:

•Net sales for the first quarter of fiscal 2026 increased 1 percent compared with the first quarter of fiscal 2025.

•Gross profit for the first quarter of fiscal 2026 was $1.42 billion compared with $1.45 billion for the first quarter of fiscal 2025. Gross margin for the first quarter of fiscal 2026 was 40.5 percent compared with 41.8 percent for the first quarter of fiscal 2025.

•Operating income for the first quarter of fiscal 2026 was $445 million compared with $260 million for the first quarter of fiscal 2025. The first quarter of fiscal 2026 includes a gain of $313 million related to a credit card interchange fee litigation settlement, net of legal fees, partially offset by a $50 million charitable contribution made concurrently.

•The effective income tax rate for the first quarter of fiscal 2026 was 24.7 percent compared with 26.6 percent for the first quarter of fiscal 2025.

•Net income for the first quarter of fiscal 2026 was $339 million compared with $193 million for the first quarter of fiscal 2025.

•Diluted earnings per share was $0.90 for the first quarter of fiscal 2026 compared with $0.51 for the first quarter of fiscal 2025.

We are focused on building momentum through the following strategic priorities:

•delivering financial and operational rigor, through an optimized cost structure and disciplined execution;

•building our brands to increase relevance, while we elevate our product and customer experience to drive sustainable growth;

•optimizing our platform to drive scale by advancing capabilities that amplify and enable our brands;

•strengthening our culture by developing talent and fostering a high-performance environment; and

•continuing to integrate sustainability into business practices to support long-term growth.

Our execution of these strategic priorities will position us to continue growing our core apparel business, while pursuing new strategic initiatives. We are expanding our beauty and accessories assortment, increasing customer engagement through our revamped loyalty program, and advancing technology capabilities throughout our organization.

Macroeconomic factors, including uncertainty surrounding global geopolitical instability, inflationary pressures, foreign currency fluctuations, and changes in interest rates, duties, tariffs, tax laws, and other restrictions as a result of government fiscal, monetary, trade, and tax policies, continue to create a complex and challenging retail environment.

In fiscal 2025, the United States enacted significant changes to its trade policy and imposed substantial tariffs on imported goods from most countries. In February 2026, the U.S. Supreme Court invalidated tariffs imposed under the International Emergency Economic Powers Act ("IEEPA"), and subsequently, new tariffs were imposed on a temporary basis pursuant to alternative statutory authority. In April 2026, the U.S. Customs and Border Protection launched a platform for importers of record to submit IEEPA tariff refund requests. We are currently evaluating our eligibility within the tariff refund process and monitoring related developments and will recognize the refund when the right to receive any amounts becomes probable and estimable. The timing and amount of any potential refund remains uncertain and may be subject to further legal and regulatory developments.

With continued uncertainty expected, we will continue to monitor the impact of macroeconomic conditions on consumer behavior and demand.

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RESULTS OF OPERATIONS

Net Sales

See Note 2 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for net sales disaggregation.

Comparable Sales ("Comp Sales")

Comp Sales include the results of Company-operated stores and sales through our online channel. The calculation of Comp Sales excludes the results of our franchise and licensing business.

A store is included in the Comp Sales calculations when it has been open and operated by the Company for at least one year and the selling square footage has not changed by 15 percent or more within the past year. A store is included in the Comp Sales calculations on the first day it has comparable prior year sales. Stores in which the selling square footage has changed by 15 percent or more as a result of a remodel, expansion, or reduction are excluded from the Comp Sales calculations until the first day they have comparable prior year sales.

A store is considered non-comparable ("Non-comp") when it has been open and operated by the Company for less than one year or has changed its selling square footage by 15 percent or more within the past year.

A store is considered "Closed" if it is temporarily closed for three or more full consecutive days or it is permanently closed. When a temporarily closed store reopens, the store will be placed in the Comp/Non-comp status it was in prior to its closure. If a store was in Closed status for three or more days in the prior year, the store will be in Non-comp status for the same days the following year.

Current year foreign exchange rates are applied to both current year and prior year Comp Sales to achieve a consistent basis for comparison.

The percentage change in Comp Sales by global brand and for The Gap, Inc., as compared with the preceding year, is as follows:

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Store count, net openings/closings, and square footage for our stores are as follows:

Outlet and factory stores are reflected in each of the respective brands.

As of May 2, 2026 and May 3, 2025, the Company's franchise partners operated approximately 1,000 franchise stores.

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Net Sales

Our net sales increased $34 million, or 1 percent, during the first quarter of fiscal 2026 compared with the first quarter of fiscal 2025, primarily driven by an increase in net sales across all brands except Athleta Global.

Cost of Goods Sold and Occupancy Expenses

Cost of goods sold and occupancy expenses increased 1.3 percentage points as a percentage of net sales in the first quarter of fiscal 2026 compared with the first quarter of fiscal 2025.

•Cost of goods sold increased 1.0 percentage point as a percentage of net sales in the first quarter of fiscal 2026 compared with the first quarter of fiscal 2025, primarily driven by an estimated impact of approximately 2 percentage points from tariff costs net of related mitigation efforts, partially offset by less promotional activity primarily at Gap Global.

•Occupancy expenses increased 0.3 percentage points as a percentage of net sales in the first quarter of fiscal 2026 compared with the first quarter of fiscal 2025, primarily driven by incremental cost related to our store population.

Uncertainty surrounding changes in U.S. trade policy and tariff rates is contributing to overall macroeconomic volatility. The Company continues to evaluate the impact of U.S. trade policy and tariff rates, which has increased cost of goods sold since fiscal 2025. Ongoing developments, including changes to tariff rates or potential refunds, will impact our gross margins in future quarters and will also impact comparability across periods. The timing and amount of any refunds remain uncertain and subject to legal and regulatory developments. As a result of these ongoing dynamics, our gross margin for the first quarter of fiscal 2026 may not be indicative of our gross margins throughout the remainder of fiscal 2026.

Operating Expenses

Operating expenses decreased $216 million, or 6.5 percentage points as a percentage of net sales during the first quarter of fiscal 2026 compared with the first quarter of fiscal 2025, primarily due to the following:

•a gain of $313 million related to a credit card interchange fee litigation settlement, net of legal fees; partially offset by

•a $50 million charitable contribution made concurrently with the interchange fee litigation settlement; and

•an increase in strategic investments.

Int

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Our Business

We are a house of iconic American brands offering apparel, accessories, and personal care products for men, women, and children under the Old Navy, Gap, Banana Republic, and Athleta brands. As of January 31, 2026, we had Company-operated stores in the United States, Canada, Japan, and Taiwan. Our products are available to customers both in stores and online, through Company-operated and franchise stores, websites, and third-party arrangements. We also have franchise agreements to operate Old Navy, Gap, Banana Republic, and Athleta throughout Asia, Europe, Latin America, the Middle East, and Africa. Under these agreements, third parties operate, or will operate, stores and websites that sell apparel and related products under our brand names. In addition to operating in the specialty, outlet, online, and franchise channels, we use our omni-channel capabilities to bridge the digital world and physical stores. The shopping experience is further enhanced by our omni-channel services, including buy online pick-up in store, order-in-store, and ship-from-store, as well as enhanced mobile-enabled experiences, which allow our customers to shop seamlessly across our brands and channels. Our brands have shared investments in supply chain and inventory management, which allows us to optimize efficiency and responsiveness in our operations. Most of the products sold under our brand names are designed by us and manufactured by independent sources globally.

Overview

Financial results for fiscal 2025 are as follows:

•Net sales for fiscal 2025 increased 2 percent to $15.4 billion compared with $15.1 billion for fiscal 2024.

•Store and franchise sales for fiscal 2025 increased 1 percent compared with fiscal 2024 and online sales for fiscal 2025 increased 4 percent compared with fiscal 2024.

•Gross profit for fiscal 2025 was $6.3 billion compared with $6.2 billion for fiscal 2024. Gross margin for fiscal 2025 was 40.8 percent compared with 41.3 percent for fiscal 2024.

•Operating income was $1.1 billion for both fiscal 2025 and fiscal 2024.

•Effective tax rate for fiscal 2025 was 27.9 percent compared with 25.8 percent for fiscal 2024.

•Net income for fiscal 2025 was $816 million compared with $844 million for fiscal 2024.

•Diluted earnings per share was $2.13 for fiscal 2025 compared with $2.20 for fiscal 2024.

•Merchandise inventory as of fiscal 2025 increased 7 percent compared with fiscal 2024.

Over the last two years, we have focused on fixing the fundamentals, enabling us to perform while we transform. As we move into the next phase of our transformation, we are focused on building momentum through the following strategic priorities:

•delivering financial and operational rigor, through an optimized cost structure and disciplined execution;

•building our brands to increase relevance, while we elevate our product and customer experience to drive sustainable growth;

•optimizing our platform to drive scale by advancing capabilities that amplify and enable our brands;

•strengthening our culture by developing talent and fostering a high-performance environment; and

•continuing to integrate sustainability into business practices to support long-term growth.

Our execution of these strategic priorities will position us to continue growing our core apparel business, while pursuing new strategic initiatives. We are expanding our beauty and accessories assortment, increasing customer engagement through our revamped loyalty program, and advancing technology capabilities throughout our organization.

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Macroeconomic factors, including uncertainty surrounding global geopolitical instability, inflationary pressures, foreign currency fluctuations, and changes in interest rates, duties, tariffs, tax laws, and other restrictions as a result of government fiscal, monetary, trade, and tax policies, continue to create a complex and challenging macro environment. In fiscal 2025, the United States enacted significant changes to its trade policy and imposed substantial tariffs on imported goods from most countries. In February 2026, the U.S. Supreme Court invalidated tariffs imposed under the IEEPA, and subsequently, new tariffs were imposed on a temporary basis pursuant to alternative statutory authority. With continued uncertainty expected during fiscal 2026, we will continue to monitor the impact of macroeconomic conditions on consumer behavior and demand. For additional information on the risks and uncertainties to our business caused by macroeconomic factors, see the sections entitled “Risk Factors—Risks Related to Macroeconomic Conditions—Our business is impacted by global economic conditions and the related impact on consumer spending” and "Risk Factors—Risks Related to Macroeconomic Conditions—Trade matters, including the imposition of tariffs by the United States, have had, and could continue to have, an adverse effect on our business" in Item 1A, Risk Factors, of this Form 10-K.

We identify our operating segments according to how our business activities are managed and evaluated. As of January 31, 2026, our operating segments included Old Navy Global, Gap Global, Banana Republic Global, and Athleta Global. Our brands have similar products, suppliers, customers, methods of distribution, and regulatory environment. We have determined that each of our operating segments share similar qualitative and economic characteristics, and, therefore, the results of our operating segments are aggregated into one reportable segment.

Results of Operations

A discussion regarding our results of operations for fiscal year 2025 compared with fiscal year 2024 is presented below. A discussion regarding our results of operations for fiscal year 2024 compared with fiscal year 2023 can be found under Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on the Form 10-K for the year ended February 1, 2025, filed with the SEC on March 18, 2025.

Net Sales

See Note 3 of Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for net sales disaggregation.

Comparable Sales ("Comp Sales")

Comp Sales include the results of Company-operated stores and sales through our online channel. The calculation of Comp Sales excludes the results of our franchise and licensing business.

A store is included in the Comp Sales calculations when it has been open and operated by the Company for at least one year and the selling square footage has not changed by 15 percent or more within the past year. A store is included in the Comp Sales calculations on the first day it has comparable prior year sales. Stores in which the selling square footage has changed by 15 percent or more as a result of a remodel, expansion, or reduction are excluded from the Comp Sales calculations until the first day they have comparable prior year sales.

A store is considered non-comparable (“Non-comp”) when it has been open and operated by the Company for less than one year or has changed its selling square footage by 15 percent or more within the past year.

A store is considered “Closed” if it is temporarily closed for three or more full consecutive days or it is permanently closed. When a temporarily closed store reopens, the store will be placed in the Comp/Non-comp status it was in prior to its closure. If a store was in Closed status for three or more days in the prior year, the store will be in Non-comp status for the same days the following year.

Current year foreign exchange rates are applied to both current year and prior year Comp Sales to achieve a consistent basis for comparison.

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The percentage change in Comp Sales by global brand and for The Gap, Inc., as compared with the preceding year, is as follows:

Store count, net openings/closings, and square footage for our stores are as follows:

Outlet and factory stores are reflected in each of the respective brands.

As of January 31, 2026 and February 1, 2025, the Company's franchise partners operated approximately 1,000 franchise stores.

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Net Sales Discussion

Our net sales for fiscal 2025 increased $280 million, or 2 percent, compared with fiscal 2024, driven primarily by an increase in online sales. The increase was primarily related to Old Navy Global and Gap Global, our two largest brands, partially offset by Athleta Global.

Cost of Goods Sold and Occupancy Expenses

Cost of goods sold and occupancy expenses increased 0.5 percentage points as a percentage of net sales in fiscal 2025 compared with fiscal 2024.

•Cost of goods sold increased 0.8 percentage points as a percentage of net sales in fiscal 2025 compared with fiscal 2024, primarily driven by an estimated impact of approximately 1.2 percentage points from tariff costs net of related mitigation efforts, partially offset by less promotional activity at all brands except Athleta Global.

•Occupancy expenses decreased 0.3 percentage points as a percentage of net sales in fiscal 2025 compared with fiscal 2024, primarily driven by an increase in online sales without a corresponding increase in occupancy expenses.

Uncertainty surrounding changes in U.S. trade policy and tariff rates is contributing to overall macroeconomic volatility. The Company continues to evaluate the impact of U.S. trade policy and tariff rates, which increased cost of goods sold in fiscal 2025. Ongoing changes to tariff rates may impact our gross margins in future quarters and may also impact comparability across periods.

Operating Expenses and Operating Margin

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