Gap Inc. forecasts potential tariff-related expenses amounting to up to $300 million
Gap Inc. Braces for Up to $150 Million in Operating Income Loss Due to Tariffs
Gap Inc., the multinational apparel company, warned on Thursday that tariffs could cost it between $250 million and $300 million in additional expenses this year, with up to $150 million siphoned from its fiscal year operating income after mitigation efforts.
The tariffs threaten the momentum the retailer has achieved, particularly for its Old Navy and namesake brands. Old Navy posted a 3% year-on-year sales growth and a 3% increase in comparable sales in Q1, with net sales reaching $2 billion. Gap, the brand itself, saw a 5% increase in net sales to $724 million, with comps also up 5%.
Results were mixed for the other brands, with the company expressing optimism about Banana Republic's performance. Although Banana Republic's net sales decreased by 3% to $428 million, comps remained unchanged. However, Athleta's recovery appears to be slow, as net sales dropped 6% to $308 million and comps plummeted 8%.
Uncertainty surrounding U.S. trade policy has left Gap executives cautious about pricing policies. Despite the tariff challenges, the company plans not to adjust its pricing at this time.
However, the status of several federal court-blocked tariffs has been restored following an appeals court stay this week, creating further complications for the company's strategy.
Execuitves expressed confidence in their resilience to handle trade developments, the consumer, and competition. They also highlighted greater pricing power at Gap and "strong sell-through" at Zac Posen's GapStudio as positive indicators.
For Q1, Gap Inc.'s net sales rose 2.2% year over year to $3.5 billion, with comps up 2%. Brick-and-mortar sales remained flat, while e-commerce rose 6%. Gross margin expanded by 60 basis points to 41.8%, with merchandise margin remaining flat and operating margin reaching 7.5%, yielding operating income of $260 million and a net income increase of more than 22% to $193 million.
The company aims to achieve $150 million in annual cost savings through various efficiency measures, a portion of which will be reinvested into growth projects.
Several analysts have expressed concerns about the potential impact of tariffs on Gap Inc.'s performance in the second half of the year. However, GlobalData Managing Director Neil Saunders commended the company's approach to absorbing some of the tariff costs rather than passing them onto customers.
Saunders noted that this strategy "is the right thing to do" and reflects well on the company's efforts to recover and maintain profitability despite trade uncertainties. Ultimately, he believes that Gap Inc. is "on a good trajectory" with "a lot more work to do to keep on track over the year ahead."
- The AI-powered strategies of Gap Inc. might need to be revised to adapt to the financial implications of the war on trade, considering the potential loss of up to $150 million from their fiscal year operating income due to tariffs.
- Despite the challenges posed by the ongoing trade policies and the potential impact on business, Gap Inc. has decided to maintain its current pricing, demonstrating their commitment to keeping prices affordable for consumers.
- As the future of trade remains uncertain, Gap Inc.'s focus on fostering efficiency and cost savings through various measures, aiming to achieve $150 million annually, indicates their resilience in navigating through the complexities of the modern industry and finance landscape.
