How Gap Inc. Plans to Reverse Old Navy’s Slump

Old Navy is expected to clear choppy waters soon.

At least that’s the perspective of officials from Gap Inc. who, in the wake of Old Navy’s 4 percent sales decline during the second quarter — the brand’s first drop in 11 quarters — provided their prescription for a rebound.

Essentially, the Old Navy repair plan revolves around:

Also, Michael Francis becomes Old Navy’s chief executive officer in November, succeeding Haio Barbeito, who transitions into an advisory role. Francis joined Gap Inc. last March as chief customer officer for Old Navy and head of marketing shared services. He’s best known for playing a pivotal role as Target’s chief marketing officer in the 2000s, molding the store’s “cheap chic” identity by tying low prices to trendy, modern designs.

Already Francis, along with Gap Inc. CEO Richard Dickson and Katrina O’Connell, executive vice president and chief financial officer, have been involved in planning Old Navy’s second-half presentation.

“Over the past quarter, Katrina and I have been deeply involved with the Old Navy team in a thorough review of the business,” Dickson said. “We have a clear understanding of where our execution fell short and have moved quickly to strengthen our plans. Based on August trends, we are encouraged by the improvement we are seeing.

“As we move into the third quarter, the headwind from summer  categories becomes much less significant,” Dickson said during a conference call with industry analysts Thursday. “This gives us a clear runway for improvement as key categories like denim, active, sweaters and knits drive the business. Additionally, as we sharpen fashion content and pricing, we believe our fall assortment will provide an improved value equation.”

Gap Inc. expects even more lift from the Old Navy Sport and Old Navy Beauty Co. introductions.

Old Navy Sport debuts this fall with shops-in-shop at about 40 Old Navy locations. “The storytelling will be centered on technical innovation and style at incredible value. Old Navy Sport will become Old Navy’s active brand,” said Dickson.

Old Navy Beauty Co. was launched nationwide at the chain this week, following earlier testing, thereby “expanding Old Navy into a destination for everyday essentials from style to beauty,” Dickson said.

Last October, Old Navy unveiled its beauty pilot plans, consisting of an in-house-developed body care collection alongside an assortment of about 40 brands curated by BeautySpace. Now the retailer has fine-tuned its strategy, doubling down on the number of doors for the third-party brands, which include E.l.f. Cosmetics, Neutrogena, Touchland, Patchology, Tree Hut and TonyMoly, and relaunching the bath and body line with upgraded packaging and product.

Dickson also said Old Navy’s partnership with Fanatics expands in September “bringing our first exclusive collection of licensed sports merchandise to customers at Old Navy’s signature value and enabling us to capitalize on key moments in the sports calendar beginning with the football season.”

Dickson said Old Navy has “rewired our marketing strategy to improve traffic trends,” including Cardi B. appearing in the brand’s “Most Wanted Denim” campaign. “Our fall denim campaign, featuring music, artist and television personality Cardi B launched earlier this month is off to a good start, driving improvement in traffic,” Dickson said. The denim she models highlights curves and volume. “Building on this success, we launched Cardi’s Cardi, extending the reach and relevance of the campaign into knits.”

Old Navy has also partnered with creator MrBeast to highlight back-to-school merchandise.

On Thursday, Gap Inc. reported that for the second quarter ended Aug. 1, net sales reached $3.7 billion, representing a 2 percent decline; comparable sales slipped 1 percent.

Old Navy, Gap Inc.’s largest brand and historically the cash cow for the corporation, posted a 4 percent drop in both net and comparable sales to $2.1 billion during the second quarter.

Sequential improvement at Old Navy is expected in the current quarter, with comparable sales projected at flat to down 1 percent, compared to last quarter’s 4 percent drop. Current trends, according to Gap Inc. officials, are “in line” with the projected range for the third quarter.

Old Navy’s sales drop aside, Wall Street apparently likes what’s happening at Gap Inc., particularly its profit picture and Thursday’s earnings upgrade. The stock price has surged since closing at $20.79 on Thursday and then seeing double-digit gains, winding up around 13 percent higher at $23.51, by the closing bell Friday.

Gap Inc. raised its outlook on 2026 earnings per diluted share to $2.35 to $2.45, from the previous forecast of $2.30 to $2.40. Second-quarter adjusted earnings per share of 52 cents beat the Street’s estimates. And second-quarter operating income more than doubled to $676 million, from $292 million a year ago. Net income rose to $501 million, or $1.38 per diluted share, from $216 million, or 57 cents per diluted share in the year-ago period.

The San Francisco-based company revised downward its forecast for 2026 sales to a 1 percent to 1.5 percent gain, from the previous forecast for a 1 percent to 2 percent gain. Last year, Gap Inc. generated $15.4 billion in sales.

In the second quarter, the company recorded a $417 million adjustment to cost of goods sold related to tariff recovery. The company received tariff refunds of $95 million and related interest income of $5 million, with the remaining refunds and related interest income expected in the third quarter.

Also supporting investor confidence was the 10 percent comparable sales gain reported at the Gap brand for the second quarter, and the 3 percent comparable sales gain at Banana Republic in the second quarter.

Commenting on the retailer’s second-quarter results, eMarketer principal analyst Suzy Davidkhanian wrote in a note, “Gap Inc. delivered mixed results this quarter, with sales below expectations but profit ahead as operational discipline helped protect margins. Today’s more intentional consumer needs a reason to spend on branded discretionary goods, making Gap’s fashion-meets-entertainment playbook particularly relevant.  However, momentum only lasts when product delivers on style, quality and value, backed by strong execution. Old Navy’s leadership change signals Gap Inc. wants to bring the same mix of cultural relevance and operational rigor that is working at Gap to its largest brand.”

Davidkhanian further wrote that she’s looking for proof that Gap Inc.’s new Encore cross-banner loyalty program is introducing customers to more of its brands, and growing baskets, and that expansion into adjacent categories like beauty is generating incremental sales.