Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our Business
We are a house of iconic American brands offering apparel, accessories, and personal care products for men, women, and children under the Old Navy, Gap, Banana Republic, and Athleta brands. As of January 31, 2026, we had Company-operated stores in the United States, Canada, Japan, and Taiwan. Our products are available to customers both in stores and online, through Company-operated and franchise stores, websites, and third-party arrangements. 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 fiscal 2025 are as follows:
• Net sales for fiscal 2025 increased 2 percent to $15.4 billion compared with $15.1 billion for fiscal 2024.
• Store and franchise sales for fiscal 2025 increased 1 percent compared with fiscal 2024 and online sales for fiscal 2025 increased 4 percent compared with fiscal 2024.
• Gross profit for fiscal 2025 was $6.3 billion compared with $6.2 billion for fiscal 2024. Gross margin for fiscal 2025 was 40.8 percent compared with 41.3 percent for fiscal 2024.
• Operating income was $1.1 billion for both fiscal 2025 and fiscal 2024.
• Effective tax rate for fiscal 2025 was 27.9 percent compared with 25.8 percent for fiscal 2024.
• Net income for fiscal 2025 was $816 million compared with $844 million for fiscal 2024.
• Diluted earnings per share was $2.13 for fiscal 2025 compared with $2.20 for fiscal 2024.
• Merchandise inventory as of fiscal 2025 increased 7 percent compared with fiscal 2024.
Over the last two years, we have focused on fixing the fundamentals, enabling us to perform while we transform. As we move into the next phase of our transformation, we are focused on building momentum through the following strategic priorities:
• delivering financial and operational rigor, through an optimized cost structure and disciplined execution;
• building our brands to increase relevance, while we elevate our product and customer experience to drive sustainable growth;
• optimizing our platform to drive scale by advancing capabilities that amplify and enable our brands;
• strengthening our culture by developing talent and fostering a high-performance environment; and
• continuing to integrate sustainability into business practices to support long-term growth.
Our execution of these strategic priorities will position us to continue growing our core apparel business, while pursuing new strategic initiatives. We are expanding our beauty and accessories assortment, increasing customer engagement through our revamped loyalty program, and advancing technology capabilities throughout our organization.
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 macro environment. In fiscal 2025, the United States enacted significant changes to its trade policy and imposed substantial tariffs on imported goods from most countries. In February 2026, the U.S. Supreme Court invalidated tariffs imposed under the IEEPA, and subsequently, new tariffs were imposed on a temporary basis pursuant to alternative statutory authority. With continued uncertainty expected during fiscal 2026, we will continue to monitor the impact of macroeconomic conditions on consumer behavior and demand. For additional information on the risks and uncertainties to our business caused by macroeconomic factors, see the sections entitled “Risk Factors—Risks Related to Macroeconomic Conditions—Our business is impacted by global economic conditions and the related impact on consumer spending” and "Risk Factors—Risks Related to Macroeconomic Conditions—Trade matters, including the imposition of tariffs by the United States, have had, and could continue to have, an adverse effect on our business" in Item 1A, Risk Factors, of this Form 10-K.
We identify our operating segments according to how our business activities are managed and evaluated. As of January 31, 2026, our operating segments included Old Navy Global, Gap Global, Banana Republic Global, and Athleta Global. Our brands have similar products, suppliers, customers, methods of distribution, and regulatory environment. We have determined that each of our operating segments share similar qualitative and economic characteristics, and, therefore, the results of our operating segments are aggregated into one reportable segment.
Results of Operations
A discussion regarding our results of operations for fiscal year 2025 compared with fiscal year 2024 is presented below. A discussion regarding our results of operations for fiscal year 2024 compared with fiscal year 2023 can be found under Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on the Form 10-K for the year ended February 1, 2025, filed with the SEC on March 18, 2025.
Net Sales
See Note 3 of Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K 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:
Fiscal Year
Old Navy Global
Gap Global
Banana Republic Global
Athleta Global
The Gap, Inc.
Store count, net openings/closings, and square footage for our stores are as follows:
February 1, 2025
Fiscal 2025
January 31, 2026
Number of
Store Locations
Net Number of Stores
Opened/(Closed)
Number of
Store Locations
Square Footage
(in millions)
Old Navy North America
Gap North America
Gap Asia
Banana Republic North America
Banana Republic Asia
Athleta North America
Company-operated stores total
February 3, 2024
Fiscal 2024
February 1, 2025
Number of
Store Locations
Net Number of Stores
Opened/(Closed)
Number of
Store Locations
Square Footage
(in millions)
Old Navy North America
Gap North America
Gap Asia
Banana Republic North America
Banana Republic Asia
Athleta North America
Company-operated stores total
Outlet and factory stores are reflected in each of the respective brands.
As of January 31, 2026 and February 1, 2025, the Company's franchise partners operated approximately 1,000 franchise stores.
Net Sales Discussion
Our net sales for fiscal 2025 increased $280 million, or 2 percent, compared with fiscal 2024, driven primarily by an increase in online sales. The increase was primarily related to Old Navy Global and Gap Global, our two largest brands, partially offset by Athleta Global.
Cost of Goods Sold and Occupancy Expenses
($ in millions)
Fiscal Year
Cost of goods sold and occupancy expenses
Gross profit
Cost of goods sold and occupancy expenses as a percentage of net sales
Gross margin
Cost of goods sold and occupancy expenses increased 0.5 percentage points as a percentage of net sales in fiscal 2025 compared with fiscal 2024.
• Cost of goods sold increased 0.8 percentage points as a percentage of net sales in fiscal 2025 compared with fiscal 2024, primarily driven by an estimated impact of approximately 1.2 percentage points from tariff costs net of related mitigation efforts, partially offset by less promotional activity at all brands except Athleta Global.
• Occupancy expenses decreased 0.3 percentage points as a percentage of net sales in fiscal 2025 compared with fiscal 2024, primarily driven by an increase in online sales without a corresponding increase in occupancy expenses.
Uncertainty surrounding changes in U.S. trade policy and tariff rates is contributing to overall macroeconomic volatility. The Company continues to evaluate the impact of U.S. trade policy and tariff rates, which increased cost of goods sold in fiscal 2025. Ongoing changes to tariff rates may impact our gross margins in future quarters and may also impact comparability across periods.
Operating Expenses and Operating Margin
($ in millions)
Fiscal Year
Operating expenses
Operating expenses as a percentage of net sales
Operating margin
Operating expenses increased $38 million, but decreased 0.4 percentage points as a percentage of net sales during fiscal 2025 compared with fiscal 2024, primarily due to an increase in net sales as well as an increase in strategic investments.
Interest Expense
($ in millions)
Fiscal Year
Interest expense
Interest expense primarily includes interest on outstanding borrowings and obligations mainly related to our Senior Notes and tax-related interest expense. Interest expense increased $6 million during fiscal 2025 compared with fiscal 2024, primarily due to lower tax-related interest expense in fiscal 2024.
Interest Income
($ in millions)
Fiscal Year
Interest income
Interest income primarily includes interest earned on our cash, cash equivalents, and short-term investments, as well as tax-related interest income. Interest income decreased slightly during fiscal 2025 compared with fiscal 2024, primarily due to lower interest rates, partially offset by higher cash balances.
Income Taxes
($ in millions)
Fiscal Year
Income tax expense
Effective tax rate
The change in the effective tax rate for fiscal 2025 compared with fiscal 2024 was primarily due to changes in the amount and mix of jurisdictional earnings, as well as less favorable impacts of share-based compensation.
See Note 4 of Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for further details.
Liquidity and Capital Resources
We consider the following to be measures of our liquidity and capital resources:
($ in millions)
January 31,
February 1,
Cash and cash equivalents
Short-term investments
Debt
3.625 percent Senior Notes due 2029
3.875 percent Senior Notes due 2031
Working capital
Current ratio
As of January 31, 2026, the majority of our cash, cash equivalents, and short-term investments were held in the United States and are generally accessible without any limitations.
We are also able to supplement near-term liquidity, if necessary, with our senior secured asset-based revolving credit agreement (the "ABL Facility") or other available market instruments. There were no borrowings under the ABL Facility as of January 31, 2026 and February 1, 2025. See Note 6 of Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for disclosures on the ABL Facility.
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. As our business typically follows a seasonal pattern, with sales peaking during the end-of-year holiday period, we fund inventory expenditures during normal and peak periods through cash flows from operating activities and available cash. 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.
Our voluntary supply chain finance ("SCF") program provides certain suppliers with the opportunity to sell their receivables due from us to participating financial institutions at the sole discretion of both the suppliers and the financial institutions. We are not a party to the agreements between our suppliers and the financial institutions and our payment terms are not impacted by whether a supplier participates in the SCF program. See Note 17 of Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K, for disclosures on the Company's SCF program.
We are party to many contractual obligations involving commitments to make payments to third parties. These obligations impact our short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on our Consolidated Balance Sheet as of January 31, 2026, while others are considered future obligations. Our contractual obligations primarily consist of operating leases, purchase obligations and commitments, long-term debt and related interest payments, and income taxes. See Notes 6 and 11 of Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for information related to our debt and operating leases, respectively.
Purchase obligations and commitments consist of open purchase orders to purchase inventory as well as commitments for products and services used in the normal course of business. As of January 31, 2026, our purchase obligations and commitments were approximately $4 billion. We expect that the majority of these purchase obligations and commitments will be settled within one year.
Our contractual obligations related to income taxes are primarily related to unrecognized tax benefits. See Note 4 of Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for information related to income taxes.
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 $193 million during fiscal 2025 compared with fiscal 2024, primarily due to the following:
• a decrease of $80 million related to accounts payable, primarily due to timing of payments for merchandise inventory compared with fiscal 2024;
• a decrease of $65 million related to accrued expenses and other current liabilities, primarily due to higher payments for fiscal 2024 performance-based compensation made during fiscal 2025; and
• a decrease of $41 million related to merchandise inventory, primarily due to higher tariff rates during fiscal 2025, partially offset by timing of receipts.
Cash Flows from Investing Activities
Net cash used for investing activities decreased $92 million during fiscal 2025 compared with fiscal 2024, primarily due to the following:
• $117 million fewer net purchases of short-term investments in fiscal 2025 compared with fiscal 2024; partially offset by
• $23 million more purchases of property and equipment during fiscal 2025 compared with fiscal 2024.
In fiscal 2025, cash used for purchases of property and equipment was $470 million primarily related to store investments, information technology systems, and supply chain improvements, to support the customer experience.
Cash Flows from Financing Activities
Net cash used for financing activities increased $98 million during fiscal 2025 compared with fiscal 2024, primarily due to the following:
• $80 million more repurchases of common stock in fiscal 2025 compared with fiscal 2024; and
• $22 million more payments of dividends in fiscal 2025 compared with fiscal 2024.
Free Cash Flow
Free cash flow is a non-GAAP financial measure. We believe free cash flow is an important metric because it represents a measure of how much cash a company has available for discretionary and non-discretionary items after the deduction of capital expenditures. We require regular capital expenditures including technology investments as well as building and maintaining our stores and distribution centers. We use this metric internally, as we believe our sustained ability to generate free cash flow is an important driver of value creation. However, this non-GAAP financial measure is not intended to supersede or replace our GAAP results.
The following table reconciles free cash flow, a non-GAAP financial measure, from net cash provided by operating activities, a GAAP financial measure.
Fiscal Year
($ in millions)
Net cash provided by operating activities
Less: Purchases of property and equipment
Free cash flow
Debt and Credit Facilities
Certain financial information about the Company's debt and credit facilities is set forth under the headings "Debt and Credit Facilities" in Note 6 of Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.
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 an annual dividend of $0.66 per share in fiscal 2025 and $0.60 per share in fiscal 2024. In February 2026, the Board authorized a dividend of $0.175 per share for the first quarter of fiscal 2026.
Share Repurchases
Certain information about the Company's share repurchases is set forth under the heading "Share Repurchases" in Note 9 of Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements.
Our significant accounting policies can be found under the heading "Organization and Summary of Significant Accounting Policies" in Note 1 of Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K. The policies and estimates discussed below include the financial statement elements that are either judgmental or involve the selection or application of alternative accounting policies and are material to our financial statements.
Inventory Valuation
We value inventory at the lower of cost or net realizable value (“LCNRV”), with cost determined using the weighted-average cost method. We review our inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes or colors), and we primarily use markdowns to clear merchandise. We record an adjustment to inventory when future estimated selling price is less than cost. Our LCNRV adjustment calculation requires management to make assumptions to estimate the selling price and amount of slow-moving merchandise and broken assortments subject to markdowns, which is dependent upon factors such as historical trends with similar merchandise, inventory aging, forecasted consumer demand, and the promotional environment.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our LCNRV. However, if estimates regarding consumer demand are inaccurate, or if global economic conditions change beyond what is currently estimated by management, our operating results could be affected.
Impairment of Long-Lived Assets
Long-lived assets, which primarily consist of property and equipment and operating lease assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Events that result in an impairment review include a significant decrease in the operating performance of the long-lived asset, the decision to close a store, corporate facility, or distribution center, or adverse changes in business climate.
Long-lived assets are considered impaired if the carrying amount exceeds the estimated undiscounted future cash flows of the asset or asset group over the estimated remaining useful life. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets. For our Company-operated stores, the individual store generally represents the lowest level of independent identifiable cash flows and the asset group is comprised of both property and equipment and operating lease assets.
For impaired assets, we recognize a loss equal to the difference between the carrying amount of the asset or asset group and its estimated fair value. The estimated fair value of the asset or asset group is based on discounted future cash flows of the asset or asset group using a discount rate commensurate with the related risk. For operating lease assets, the Company determines the estimated fair value of the assets by comparing the discounted contractual rent payments to estimated market rental rates using available valuation techniques.
Our estimate of future cash flows requires management to make assumptions and to apply judgment, including forecasting future sales and gross profits and estimating useful lives of the assets. These estimates can be affected by factors such as future sales results, real estate market conditions, store closure plans, economic conditions, business interruptions, interest rates and government regulations that can be difficult to predict. If actual results and conditions are not consistent with the estimates and assumptions used in our calculations, we may be exposed to additional impairments of long-lived assets.
See Note 7 of Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for additional information and disclosures about impairment of long-lived assets.
Income Taxes
We are a multinational company operating in multiple domestic and foreign locations with different tax laws and regulations. The Company's management is required to interpret and apply these tax laws and regulations in determining the amount of its income tax liability for financial statement purposes. We record valuation allowances against our deferred tax assets when it is more likely than not that some portion or all of such deferred tax assets will not be realized. In determining the need for valuation allowances, management is required to make assumptions and to apply judgment, including tax planning strategies, forecasting future income, taxable income, and the geographic mix of income or losses in the jurisdictions in which we operate. Our effective tax rate in a given financial statement period may also be materially impacted by changes in the geographic mix and level of income or losses, changes in the expected or actual outcome of audits, changes in deferred tax valuation allowances, or new tax legislation.
On a recurring basis, we assess the need for valuation allowances related to our deferred income tax assets, which includes consideration of both positive and negative evidence to determine, based on the weight of the available evidence, whether it is more likely than not that some or all of our deferred tax assets will not be realized. In our assessment, we consider recent financial operating results, the scheduled expiration of our net operating losses, potential sources of taxable income, the reversal of existing taxable differences, taxable income in prior carryback years (if permitted under tax law), and tax planning strategies.
It is possible that there will be changes in our business structure, our performance, our industry or otherwise that cause results to differ materially in future periods. If the changes result in significant and sustained reductions in our pre-tax income or utilization of existing tax carryforwards in future periods, additional valuation allowances may be required with corresponding adverse impacts on results of operations. Such adverse impacts may be material.
At any point in time, many tax years are subject to or in the process of being audited by various U.S. and foreign tax jurisdictions. These audits include reviews of our tax filing positions, including the timing and amount of deductions taken and the allocation of income between tax jurisdictions. When an uncertain tax position is identified, we recognize a benefit only if we believe it is more likely than not that the tax position based on its technical merits will be sustained upon examination by the relevant tax authorities. We recognize a benefit for tax positions using the highest cumulative tax benefit that is more likely than not to be realized. We establish a liability for tax positions that do not meet this threshold. The evaluation of uncertain tax positions requires management to apply specialized skill and knowledge related to tax laws and regulations and to make assumptions that are subject to factors such as possible assessments by tax authorities, changes in facts and circumstances, issuance of new regulations, and resolutions of tax audits. To the extent we prevail in matters for which a liability has been established or are required to pay amounts in excess of our established liability, our effective income tax rate in a given financial statement period could be materially affected.
See Note 4 of Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for additional information on income taxes.
Revenue Recognition
The Company’s revenues primarily include merchandise sales at stores, online, and through franchise and licensing agreements. We also receive revenue sharing from our credit card agreement for private label and co-branded credit cards, and recognize breakage revenue related to our gift cards, merchandise return cards, and outstanding loyalty points based upon historical redemption patterns. For online sales, the Company has elected to treat shipping and handling as fulfillment activities and not a separate performance obligation. Accordingly, we recognize revenue for our single performance obligation related to online sales at the time control of the merchandise passes to the customer, which is generally at the time of shipment. Revenues are presented net of any taxes collected from customers and remitted to governmental authorities.
We record sales return allowances and a right of returns asset on a gross basis for expected future merchandise returns, based on historical return patterns, merchandise mix, and recent trends. The actual amount of customer returns, which are inherently uncertain, may differ from our estimates. Sales return allowances are recorded within accrued expenses and other current liabilities and the right of returns asset is recorded within other current assets on our Consolidated Balance Sheets.
We also defer revenue when cash payments are received in advance of performance for unsatisfied obligations related to our gift cards, licensing agreements, outstanding loyalty points, and reimbursements of loyalty program rewards associated with our credit card agreement.
See Note 3 of Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for related revenue disclosures.
Recent Accounting Pronouncements
See "Organization and Summary of Significant Accounting Policies" in Note 1 of Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for recent accounting pronouncements, including the expected dates of adoption and estimated effects on our Consolidated Financial Statements.
