Gap Navigates Tariff Threats and Global Trade Shifts While Outperforming Earnings Expectations

Gap Inc. warned that new tariffs imposed by the U.S. government could impact its business by $100 million to $150 million if they remain in effect through the year. These tariffs include a 30% duty on Chinese imports and a 10% levy on goods from most other countries.

Initially, the cost without mitigation efforts would be between $250 million and $300 million, though Gap has managed to reduce roughly half of that amount so far. The company is not yet including the projected tariff costs in its financial guidance, anticipating more actions to lessen the burden.

Gap Boosts U.S. Sourcing and Beats Earnings Amid Ongoing Global Tariff Pressures

To address the rising tariff costs, Gap is intensifying efforts to diversify its supply chain. CEO Richard Dickson announced that the company will increase its sourcing of U.S.-grown cotton and reduce reliance on Chinese manufacturing, which is expected to fall below 3% of total sourcing by year-end.

Gap currently relies heavily on Vietnam and Indonesia, which account for 27% and 19% of production, respectively. However, potential reciprocal tariffs — such as a 46% duty on Vietnamese imports — present further risks to the company’s margins.

Despite the looming tariff challenges, Gap reported strong fiscal first-quarter results. The company posted earnings per share of 51 cents, beating Wall Street expectations of 45 cents. Revenue rose to $3.46 billion, surpassing the projected $3.42 billion and reflecting a 2% year-over-year increase. Net income reached $193 million, up from $158 million a year earlier. These results underscore early progress in Dickson’s turnaround strategy for the company.

Gap Faces Tariff Challenges, Strong Earnings, and Strategic Shifts Amid Global Trade Uncertainty

Looking ahead, Gap’s guidance was mostly aligned with Wall Street expectations, forecasting full-year sales growth between 1% and 2%. However, the company’s gross margin outlook of 41.8% fell short of the 42.5% expected by analysts. Importantly, this anticipated margin dip is not attributed to tariffs but to the absence of prior-year benefits from the company’s credit card program. For the current quarter, sales are expected to remain flat, reinforcing a cautious tone in the short-term outlook.

Gap’s transformation strategy is being tested by the unpredictability of international trade policies. The company initially expected minimal tariff impact earlier in the year, but the reality has shifted significantly. The Trump administration’s aggressive tariff stance has introduced considerable uncertainty, especially with high duties on Chinese goods and threats to Vietnamese imports. Despite these challenges, the company’s early performance improvements — including 2% growth in comparable sales and stronger-than-expected margins — indicate that the turnaround plan is still gaining traction.