Apparel retailer Gap Inc. (NYSE:GAP) reported its second quarterearnings on August 27th. The results saw the firm post $3.65 billion in revenue and $0.52 in earnings per share to miss analyst revenue estimates of $3.69 billion and beat earnings estimates of $0.48. Consequently, the shares closed a strong 12.9% higher on the 28th. Cramer discussed Gap Inc. (NYSE:GAP)’s earnings during his morning appearance on the same day:
“Flaghip Gap, up 10%. Banana Republic, fine. Old Navy, not that good, but admittedly, Richard Dickson says it. . .the last two months have been very good, so a good cadence going in. David there had been a lot of people who had jumped ship, they were very excited about Gap when Richard Dickson came in. And they went Neutral, whatever. So when the last guy goes Neutral, bingo! Take off. Now there’s a big short position in the name, believe it or not, 12%
“Because Old Navy, they’re addressing the problem, bringing someone, actually, a veteran of Target. But a person who’s been at the company and there’s a sense that that’s what you needed to shake things up a little. I do point out, the company’s no longer a really big company relative to other retailers but it’s a very high profile retailer. . .”
Over the past couple of months, Jim Cramer has discussed Gap Inc. on several occasions. For instance, in late May, the CNBC TV host remarked that while CEO Dickson was doing a great job, his performance had been inconsistent after the firm reported its first quarter earnings. Gap Inc.’s turnaround is naturally at the center of its debate, with the bulls and bears divided on whether the turnaround and the margin expansion can fare well against broader macroeconomic headwinds.
On the margin front, Gap Inc.’s latest quarter did come with some healthy metrics. For instance, even if the impact of tariff refunds on the firm’s earnings is removed, they still mark an annual growth. During Q2, Gap Inc.’s adjusted EPS beat the estimates even though revenue dropped by 2% sequentially. Additionally, the firm’s fiscal year 2026 adjusted earnings guidance was raised to range between $2.35 to $2.45 from the earlier $2.30 to $2.40, which indicated mid-single-digit earnings growth to outpace revenue growth.
Yet, not only were the adjusted earnings down by 18% annually, but Gap Inc. also trimmed full year revenue guidance to 1% to 1.5% from the earlier 1% to 2%. The firm’s struggles with its brands were to blame, with Old Navy driving the downward revision. Old Navy is Gap Inc.’s largest brand and represents 55% of the firm’s revenue. Old Navy sales dropped by 4% annually in the quarter for the worst performance in quite some time. Additionally, comparable sales also dropped by 4% to miss analyst estimates. Combined, these troubles could indicate that the turnaround could take quite some time.
The turmoil has also led to Gap Inc.’s forward P/E of 8.89 being lower than peers Abercrombie’s 13.62 and American Eagle’s 11.67. Yet, interestingly, hedge fund interest in all three is the same. During Q2, 36 out of 1,006 funds covered by Insider Monkey had held a stake in the three retailers, each. Similarly, Gap Inc.’s short interest as a percentage of float of 15% is not significantly higher than Abercrombie’s 12.41%.
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