Gap sales fell 2% as a $417 million tariff-recovery benefit lifted reported profit

Gap Inc. (NYSE: GAP) reported net sales of $3.651 billion for the 13 weeks ended August 1, 2026, down 2% from the year-earlier quarter, while comparable sales fell 1%. Reported operating income was $676 million, net income was $501 million and diluted earnings per share was $1.38. Those reported figures include a $417 million net benefit in cost of goods sold from the recovery of tariffs paid under the International Emergency Economic Powers Act; approximately $5 million of related interest also affected pretax income, net income and EPS. Excluding the net tariff recovery, Gap’s non-GAAP operating income was $259 million. Excluding the recovery, related interest income and their tax effects, adjusted diluted EPS was $0.52.

The matching $417 million figures in Gap’s filing describe two different accounting objects.

For the income statement, Gap said it submitted approximately $512 million of eligible tariff-refund claims and made a separate approximately $95 million commitment of appreciation for certain vendors. The difference—approximately $417 million—was recorded as a reduction to cost of goods sold. That net benefit lifted reported gross margin to 52.8% and reported operating margin to 18.5%. Excluding the recovery, Gap’s non-GAAP adjusted gross margin was 41.4% and adjusted operating margin was 7.1%.

For the balance sheet, Gap had received approximately $95 million of the approximately $512 million of claimed refunds in cash by August 1. The remaining approximately $417 million was recorded as a receivable in other current assets. The filing does not equate the vendor commitment with cash received from U.S. Customs and Border Protection, and this article does not combine the two offsets. Gap said it expected to receive the remaining refunds and interest in the third quarter, but the 10-Q preserved uncertainty around timing and recoverability. That timing is an issuer expectation, not a settled receipt date.

Brand results were mixed. Old Navy net sales were $2.061 billion, down 4%, and comparable sales fell 4%. Gap-brand net sales were $844 million, up 9%, while comparable sales rose 10%. Banana Republic net sales rose 1% and comparable sales rose 3%; Athleta net sales and comparable sales each fell 12%. Management attributed Old Navy’s decline to women’s seasonal-assortment pressure and an unanticipated traffic slowdown. That explanation is management’s characterization, not independently established causation.

For the first 26 weeks of fiscal 2026, operating cash flow was $550 million and capital expenditures were $289 million, producing issuer-defined non-GAAP free cash flow of $261 million. Gap said it returned $726 million to shareholders year to date through $601 million of share repurchases and $125 million of dividends. The $601 million is a year-to-date cash-flow figure; this article does not double-count the accelerated share repurchase funded in the first quarter when it settled in the second quarter.

The full-year reported-to-adjusted EPS bridge also includes two first-quarter items that should not be mistaken for second-quarter operating results. Gap’s reported EPS range of $3.77 to $3.87 is reconciled to adjusted EPS of $2.35 to $2.45 by subtracting $0.63 for the after-tax credit-card interchange litigation gain, adding $0.10 for the after-tax EPS impact of the separate charitable contribution, and subtracting $0.89 for the net tariff recovery and related interest. The company recorded the $313 million pre-tax litigation gain, net of legal fees, and made the separate $50 million charitable contribution in fiscal Q1.

Gap also updated its tariff-rate assumption and estimated approximately $15 million of fiscal 2026 gross-profit and operating-income relief, concentrated in the fourth quarter. That estimate, like the rest of the outlook, is forward-looking.

Why it matters

Reported earnings and the operating-margin jump cannot be read as a clean measure of retail demand because the tariff recovery was material to both. Comparable sales and the non-GAAP figures provide a separate view of the quarter, while the two $417 million disclosures must remain attached to their different income-statement and balance-sheet meanings. The raised adjusted-profit ranges also sit beside a narrower sales-growth range and weaker full-year comparable-sales guidance for Old Navy.