Gap Soars On Old Navy CEO Shake-Up As Jefferies Sees "New Catalyst" For Stock

Shares of major U.S. clothing retailer Gap, whose brands include Old Navy, Banana Republic and others, jumped the most in 16 months in premarket trading after the company reported stronger-than-expected profit and upgraded its earnings outlook. The company also named retail veteran Michael Francis as Old Navy's next CEO.

Francis spent 26 years at Target, where he helped engineer the retailer's "cheap chic" strategy, before advising Walmart on its marketing operations. He joined Old Navy in March as chief customer officer.

The leadership shake-up comes after Old Navy's comparable sales fell 4% last quarter, twice the 2% decline expected by analysts tracked by Bloomberg. Gap CEO Richard Dickson blamed mispriced and poorly curated assortments of dresses, shorts and swimwear, along with marketing that failed to generate store traffic.

"What we did not anticipate was the degree to which our marketing would fall short in driving traffic," Dickson told analysts. "We are not satisfied with this result."

Gap lowered the upper end of its 2026 net-sales outlook and reduced its forecast for Old Navy's comparable sales. However, the retailer raised its full-year earnings-per-share guidance after higher prices at Gap and Banana Republic, along with improved operating efficiency, supported margins.

Shares jumped as much as 15% in premarket trading following the earnings and leadership announcements. If the gains hold through today's cash session, it would mark the stock's biggest intraday advance since April 2, 2025.

Shares have traded within a tight range since the end of 2023, bouncing between support near $20 and resistance near $30. Since the Dot-Com era of 2000, the stock has largely traded sideways.

Short interest in the stock stands at around 12.6%, equivalent to roughly 29.9 million shares sold short. Days to cover stands at around 5.7.

Bloomberg data show eight "Buy" ratings, 12 "Neutral" ratings, and zero "Sell" ratings. The average 12-month Wall Street price target is around $27.

Jefferies analyst Corey Tarlowe offered his initial take on the earnings:

Gap Brand Keeps Winning; Old Navy Missed But Improvements Underway

GAP delivered a mixed Q2, with profit ahead of cons despite weaker-than-expected sales. Gap brand continued to significantly outperform (+10% comp), while Old Navy's -4% comp reflected assortment and marketing missteps that mgmt believes are largely behind it. Encouraging August trends, raised FY26 EPS guidance ($2.35-$2.45), incremental tariff relief, and an upcoming Old Navy leadership transition could support a stronger 2H outlook. Raising PT to $24.

What We DID LIKE in the Quarter

1) Gap Brand Momentum Remains Exceptional. Gap delivered comp growth of +10%, marking its 11th consecutive quarter of positive comps. Strength remained broad-based across departments, while customer acquisition, market share gains, and lower discounting highlight the durability of the reinvigoration strategy.

2) Profitability Outperformed. Despite top-line pressure from ON, adj. GM expanded 20bps to 41.4%, while merch margin increased 80bps on stronger pricing, lower discounting, and tariff mitigation efforts. Adj. OM of 7.1% exceeded expectations, demonstrating continued cost discipline.

What We DIDN'T LIKE in the Quarter

1) Old Navy Stumbled and Athleta Remains a Drag. Old Navy (ON) comps declined 4%, driven by weakness in women's seasonal categories and softer traffic. Mgmt acknowledged issues around assortment, pricing, and marketing execution, prompting a reduction in FY26 comp expectations to flat to down 1%. Athleta comps fell 12% as management maintained a cautious inventory posture while continuing its turnaround efforts. While profitability and inventory productivity improved, meaningful sales recovery remains elusive.

What We See Ahead

1) Old Navy Recovery Is the Key Debate. Mgmt cited improving August trends as seasonal product headwinds faded and new fall marketing gained traction. Strength in denim, active, sweaters, and knits, alongside initiatives such as Sport, Beauty, and Fanatics, should support sequential improvement in 2H. The announcement of Michael Francis as Old Navy's next president and CEO also introduces a new catalyst to help accelerate improvements at the company's largest brand.

2) Raising the Earnings Outlook. Mgmt raised FY26 adj. OM guidance to 7.4%-7.6% and EPS guidance to $2.35-$2.45. Incremental tariff relief, continued AUR growth, cost savings, and buybacks should support earnings growth through year-end.

3) New Growth Vehicles Emerging. Mgmt continues to invest in beauty and accessories, including the nationwide launch of Old Navy Beauty, Gap's fragrance relaunch, and a new accessories platform. While the near-term financial contribution should be limited, these initiatives could provide incremental opportunities for traffic, engagement, and margin over time.

Details From the Call and Callback

Mgmt repeatedly emphasized ON improvement and stronger August trends as key underpinnings of its outlook and confidence.

CNBC quoted incoming Old Navy CEO Francis as saying the brand would "continue to sharpen our customer focus, strengthen the brand's cultural relevance, enhance the customer experience across every touchpoint and build on the momentum already underway."

Now it is Francis' turn to prove he can bring cash-strapped shoppers back to Gap's largest brand.