Gap Warns Tariffs Will Hurt Profits as Stock Drops 7%

Clothing retailer Gap issued a warning about import tariff pressures affecting its business and projected annual profits below Wall Street expectations. The company's stock fell 7% in after-hours trading following the announcement.

Clothing retailer Gap Inc. became the latest major company to sound the alarm about import tariff impacts, projecting annual earnings below Wall Street expectations and causing its stock to tumble 7% in after-hours trading Thursday.

The retailer behind Old Navy and Gap stores said its yearly financial projections don’t factor in recent Supreme Court decisions regarding tariffs under the 1977 International Emergency Economic Powers Act or temporary duties implemented by President Donald Trump.

“Changes in global tariff rates in 2025 had a substantial impact on our profits,” Gap’s Chief Financial Officer Katrina O’Connell stated during an earnings conference call.

The company anticipates a 200-basis-point hit to its current quarter’s gross profit margins due to U.S. import duties.

Industry analyst Sky Canaves from eMarketer explained the broader challenge: “U.S. trade policy uncertainty is the single biggest force behind the sector-wide pressure.”

Canaves added: “The latest threats to bring tariffs back to the pre-ruling levels are sowing unease about apparel companies’ ability to absorb or pass on the costs.”

Gap isn’t alone in facing these challenges. Competitors American Eagle and Abercrombie & Fitch, along with footwear company Steve Madden, have similarly reported tariff-related pressures affecting their profit margins and business strategies.

According to Gap’s 2024 annual filing, roughly 46% of the company’s merchandise comes from Southeast Asian nations including Vietnam and Indonesia, regions that faced duties last year. The retailer has been working to diversify its supply chain and has increased prices on certain items like denim to counter the tariff effects.

The company, famous for its jeans and casual wear, projects annual adjusted earnings between $2.20 and $2.35 per share, mostly falling short of the $2.32 average analyst prediction compiled by LSEG.

Despite the challenges, Gap announced a $1 billion stock buyback initiative.

During the holiday shopping period, Gap’s same-store sales increased 3%, slightly missing the anticipated 3.08% growth as consumers, especially those with lower incomes, hunted for deals and postponed discretionary purchases.

Following industry trends, Gap has significantly boosted its advertising investments to draw customers. The company plans to spend approximately $650 million on capital expenditures for the full year, up from $470 million in 2025.

The Athleta brand continued struggling with declining sales for the fifth consecutive quarter as management works on a turnaround strategy.

Gap reported quarterly revenue of $4.24 billion, meeting analyst expectations, though earnings per share came up one cent short of projections.