Gap : Quarterly Report for Quarter Ending November 1, 2025 (Form 10-Q)

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

OUR BUSINESS

We are a house of iconic 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, 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 the third quarter of fiscal 2025 are as follows:

•Net sales for the third quarter of fiscal 2025 increased 3 percent compared with the third quarter of fiscal 2024.

•Store and franchise sales for the third quarter of fiscal 2025 increased 3 percent compared with the third quarter of fiscal 2024, and online sales for the third quarter of fiscal 2025 increased 2 percent compared with the third quarter of fiscal 2024.

•Gross profit for the third quarter of fiscal 2025 was $1.67 billion compared with $1.64 billion for the third quarter of fiscal 2024. Gross margin for the third quarter of fiscal 2025 was 42.4 percent compared with 42.7 percent for the third quarter of fiscal 2024.

•Operating income for the third quarter of fiscal 2025 was $334 million compared with $355 million for the third quarter of fiscal 2024.

•The effective income tax rate for the third quarter of fiscal 2025 was 30.0 percent compared with 24.1 percent for the third quarter of fiscal 2024.

•Net income for the third quarter of fiscal 2025 was $236 million compared with $274 million for the third quarter of fiscal 2024.

•Diluted earnings per share was $0.62 for the third quarter of fiscal 2025 compared with $0.72 for the third quarter of fiscal 2024.

•Merchandise inventory as of the third quarter of fiscal 2025 increased 5 percent compared with the third quarter of fiscal 2024.

We remain focused on the following strategic priorities while we continue to transform:

•maintaining and building upon financial and operational rigor, through an optimized cost structure and disciplined inventory management;

•reinvigorating our brands to drive relevance and an engaging omni-channel experience;

•strengthening and evolving our operating platform with a digital-first mindset to drive scale and efficiency;

•energizing our culture by attracting and retaining strong talent; and

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

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. The United States has recently enacted significant changes to its trade policy and imposed substantial tariffs on imported goods from a number of countries. The ongoing impact of increased tariff rates and uncertainty surrounding changes in U.S. trade policy are contributing to overall macroeconomic volatility. The higher tariff rates increased cost of goods sold during the third quarter of fiscal 2025 and are expected to impact our gross margins in future quarters. The Company continues to monitor the impact of the current trade policy while we continue to pursue mitigating actions including adjustments to our sourcing, manufacturing, assortments, and pricing.

The macroeconomic environment has had and may continue to have an impact on consumer behavior, and we anticipate continued uncertainty related to the macroeconomic environment during fiscal 2025. We will continue to monitor macroeconomic conditions and evaluate mitigating actions. For additional information on risks related to macroeconomic conditions and our supply chain, see the section entitled "Risk Factors-Risks Related to Our Business Operations-Trade matters, including the impact of current or potential tariffs by the United States, may disrupt our supply chain and adversely affect our business, financial condition, and results of operations" in Part II, Item 1A of this Quarterly Report on Form 10-Q, and the section entitled "Risk Factors-Risks Related to Macroeconomic Conditions-Global economic conditions have and could continue to adversely affect our business, financial condition, and results of operations" in Part II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended May 3, 2025.

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:

			13 Weeks Ended												39 Weeks Ended
			November 1, 2025						November 2, 2024						November 1, 2025						November 2, 2024
Old Navy Global			6		%				-		%				4		%				3		%
Gap Global			7		%				3		%				6		%				3		%
Banana Republic Global			4		%				(1)		%				3		%				-		%
Athleta Global			(11)		%				5		%				(9)		%				1		%
The Gap, Inc.			5		%				1		%				3		%				2		%

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

			February 1, 2025						39 Weeks Ended November 1, 2025						November 1, 2025
			Number of Store Locations						Net Number of Stores Opened/(Closed)						Number of Store Locations						Square Footage (in millions)
Old Navy North America			1,249						(6)						1,243						19.6
Gap North America			453						7						460						4.9
Gap Asia			122						3						125						1.1
Banana Republic North America			380						(9)						371						3.1
Banana Republic Asia			42						-						42						0.1
Athleta North America			260						(4)						256						1.0
Company-operated stores total			2,506						(9)						2,497						29.8
			February 3, 2024						39 Weeks Ended November 2, 2024						November 2, 2024
			Number of Store Locations						Net Number of Stores Opened/(Closed)						Number of Store Locations						Square Footage (in millions)
Old Navy North America			1,243						12						1,255						19.9
Gap North America			472						(11)						461						4.9
Gap Asia			134						(9)						125						1.1
Banana Republic North America			400						(7)						393						3.3
Banana Republic Asia			43						(3)						40						0.1
Athleta North America			270						-						270						1.1
Company-operated stores total			2,562						(18)						2,544						30.4

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

As of November 1, 2025 and November 2, 2024, the Company's franchise partners operated approximately 1,000 franchise stores.

Net Sales

Our net sales increased $113 million, or 3 percent, during the third quarter of fiscal 2025 compared with the third quarter of fiscal 2024, and increased $193 million, or 2 percent, during the first three quarters of fiscal 2025 compared with the first three quarters of fiscal 2024, driven primarily by an increase in Comp Sales across all brands except for Athleta Global.

Cost of Goods Sold and Occupancy Expenses

			13 Weeks Ended												39 Weeks Ended
($ in millions)			November 1, 2025						November 2, 2024						November 1, 2025						November 2, 2024
Cost of goods sold and occupancy expenses			$	2,272					$	2,194					$	6,476					$	6,322
Gross profit			$	1,670					$	1,635					$	4,654					$	4,615
Cost of goods sold and occupancy expenses as a percentage of net sales			57.6		%				57.3		%				58.2		%				57.8		%
Gross margin			42.4		%				42.7		%				41.8		%				42.2		%

Cost of goods sold and occupancy expenses increased 0.3 percentage points as a percentage of net sales in the third quarter of fiscal 2025 compared with the third quarter of fiscal 2024.

•Cost of goods sold increased 0.7 percentage points as a percentage of net sales in the third quarter of fiscal 2025 compared with the third quarter of fiscal 2024, primarily driven by the impact of tariff costs, partially offset by less promotional activity at all brands except Athleta Global.

•Occupancy expenses decreased 0.4 percentage points as a percentage of net sales in the third quarter of fiscal 2025 compared with the third quarter of fiscal 2024, primarily driven by an increase in Comp Sales without a corresponding increase in occupancy expenses.

Cost of goods sold and occupancy expenses increased 0.4 percentage points as a percentage of net sales in the first three quarters of fiscal 2025 compared with the first three quarters of fiscal 2024.

•Cost of goods sold increased 0.8 percentage points as a percentage of net sales in the first three quarters of fiscal 2025 compared with the first three quarters of fiscal 2024, primarily driven by the impact of tariff costs in the third quarter of fiscal 2025, partially offset by less promotional activity at all brands except Athleta Global.

•Occupancy expenses decreased 0.4 percentage points as a percentage of net sales in the first three quarters of fiscal 2025 compared with the first three quarters of fiscal 2024, primarily driven by an increase in online sales without a corresponding increase in occupancy expenses.

The ongoing impact of increased tariff rates and uncertainty surrounding changes in U.S. trade policy are contributing to overall macroeconomic volatility. The Company continues to monitor the impact of the higher tariff rates which have increased cost of goods sold in the third quarter of fiscal 2025 and are expected to impact our gross margins in future quarters.

Operating Expenses

			13 Weeks Ended												39 Weeks Ended
($ in millions)			November 1, 2025						November 2, 2024						November 1, 2025						November 2, 2024
Operating expenses			$	1,336					$	1,280					$	3,768					$	3,762
Operating expenses as a percentage of net sales			33.9		%				33.4		%				33.9		%				34.4		%
Operating margin			8.5		%				9.3		%				8.0		%				7.8		%

Operating expenses increased $56 million, or 0.5 percentage points as a percentage of net sales during the third quarter of fiscal 2025 compared with the third quarter of fiscal 2024, primarily driven by an increase due to the timing of performance-based compensation and an increase in strategic investments.

Operating expenses increased $6 million, but decreased 0.5 percentage points as a percentage of net sales during the first three quarters of fiscal 2025 compared with the first three quarters of fiscal 2024, primarily due to an increase in net sales while maintaining overall operating discipline.

Interest Expense

			13 Weeks Ended												39 Weeks Ended
($ in millions)			November 1, 2025						November 2, 2024						November 1, 2025						November 2, 2024
Interest expense			$	23					$	23					$	69					$	68

Interest expense primarily includes interest on outstanding borrowings and obligations mainly related to our Senior Notes and tax-related interest expense.

Interest Income

			13 Weeks Ended												39 Weeks Ended
($ in millions)			November 1, 2025						November 2, 2024						November 1, 2025						November 2, 2024
Interest income			$	(26)					$	(29)					$	(79)					$	(80)

Interest income decreased $3 million during the third quarter of fiscal 2025 compared with the third quarter of fiscal 2024 primarily due to lower interest rates, partially offset by higher cash balances. Interest income was relatively flat during the first three quarters of fiscal 2025 compared with the first three quarters of fiscal 2024.

Income Taxes

			13 Weeks Ended												39 Weeks Ended
($ in millions)			November 1, 2025						November 2, 2024						November 1, 2025						November 2, 2024
Income tax expense			$	101					$	87					$	251					$	227
Effective tax rate			30.0		%				24.1		%				28.0		%				26.2		%

The increase in the effective tax rate for the third quarter of fiscal 2025 compared with the third quarter of fiscal 2024 is primarily due to the cumulative impact of a change in the Company's estimated annual effective tax rate and changes in the amount and mix of jurisdictional earnings.

The increase in the effective tax rate for the first three quarters of fiscal 2025 compared with the first three quarters of fiscal 2024 is primarily due to changes in the amount and mix of jurisdictional earnings and less favorable impacts of stock-based compensation, partially offset by prior year increases to certain income tax reserves.

On July 4, 2025, the OBBBA was enacted in the United States. The Company included the impact of the OBBBA tax legislation in the second quarter of fiscal 2025, the period of enactment, and the impact was not material to the Condensed Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity include cash and cash equivalents, short-term investments, and our ABL Facility. As of November 1, 2025, we had cash and cash equivalents of $2.26 billion and short-term investments of $255 million. We hold our cash, cash equivalents, and short-term investments across a diversified set of reputable financial institutions and monitor the credit standing of those financial institutions. In addition, we are also able to supplement near-term liquidity, if necessary, with our ABL Facility or other available market instruments. There were no borrowings under the ABL Facility as of November 1, 2025. See Note 4 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for disclosures on our debt and credit facilities.

Our largest source of operating cash flows is cash collections from the sale of our merchandise. Our primary uses of cash include merchandise inventory purchases, lease and occupancy costs, personnel-related expenses, purchases of property and equipment, shipping costs, and payment of taxes. In addition, we may have dividend payments and share repurchases. The seasonality of our operations, in addition to the impact of macroeconomic factors, may lead to significant fluctuations in certain asset and liability accounts as well as cash inflows and outflows between fiscal year-end and subsequent interim periods. These macroeconomic factors include 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.

We believe our existing balances of cash, cash equivalents, and short-term investments, along with our cash flows from operations, and instruments mentioned above, provide sufficient funds for our business operations as well as capital expenditures, dividends, share repurchases, and other liquidity requirements associated with our business operations over the next 12 months and beyond.

Cash Flows from Operating Activities

Net cash provided by operating activities decreased $263 million during the first three quarters of fiscal 2025 compared with the first three quarters of fiscal 2024, primarily due to the following:

•a decrease of $133 million related to accounts payable primarily due to timing of payments for merchandise inventory during the first three quarters of fiscal 2025 compared with the first three quarters of fiscal 2024; and

•a decrease of $97 million related to accrued expenses and other current liabilities primarily due to higher payments for fiscal 2024 performance-based compensation made during the first three quarters of fiscal 2025 as well as a decrease in current performance-based compensation.

Cash Flows from Investing Activities

Net cash used for investing activities decreased $249 million during the first three quarters of fiscal 2025 compared with the first three quarters of fiscal 2024, primarily due to $246 million fewer net purchases of short-term investments.

Cash Flows from Financing Activities

Net cash used for financing activities increased $165 million during the first three quarters of fiscal 2025 compared with the first three quarters of fiscal 2024, primarily due to $152 million in repurchases of common stock during the first three quarters of fiscal 2025 compared with no repurchases during the first three quarters of fiscal 2024.

Free Cash Flow

Free cash flow is a non-GAAP financial measure. We believe free cash flow is an important metric because it represents a measure of how much cash a company has available for discretionary and non-discretionary items after the deduction of capital expenditures. We require regular capital expenditures including technology investments as well as building and maintaining our stores and distribution centers. We use this metric internally, as we believe our sustained ability to generate free cash flow is an important driver of value creation. However, this non-GAAP financial measure is not intended to supersede or replace our GAAP results.

The following table reconciles free cash flow, a non-GAAP financial measure, from a GAAP financial measure.

			39 Weeks Ended
($ in millions)			November 1, 2025						November 2, 2024
Net cash provided by operating activities			$	607					$	870
Less: Purchases of property and equipment			(327)						(330)
Free cash flow			$	280					$	540

Dividend Policy

In determining whether and at what level to declare a dividend, our Board considers a number of factors including sustainability, operating performance, liquidity, and market conditions.

We paid a dividend of $0.165 per share during the third quarter of fiscal 2025. In November 2025, the Board authorized a dividend of $0.165 per share for the fourth quarter of fiscal 2025.

Share Repurchases

Certain information about the Company's share repurchases is set forth in Note 7 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Summary Disclosures about Contractual Cash Obligations and Commercial Commitments

There have been no material changes to our contractual obligations and commercial commitments as disclosed in our Annual Report on Form 10-K as of February 1, 2025, other than those which occur in the normal course of business. See Note 9 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for disclosures on commitments and contingencies.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended February 1, 2025. See Note 1 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q, for disclosures on accounting policies.