Shares of Gap surged as much as 24.1% to a four-month high on Friday after the retailer named Michael Francis as CEO of Old Navy, putting a veteran executive in charge of its biggest brand as it seeks to revive a business that has struggled to attract shoppers. The stock was last trading 15% higher at $23.95, which would add about $1.14 billion to Gap's market value if the gains hold. According to The Economic Times, the sharp rally came despite continued weakness at Old Navy, suggesting investors were encouraged by the leadership change and the prospect of a fresh push to turn around the largest brand. Francis joined Gap in March as Old Navy's chief customer officer and brings more than four decades of experience in marketing, commercial operations and business transformation, including roles at Target and Walmart.
The stock surge was further fueled by the company's second-quarter earnings that comfortably beat Wall Street expectations. Gap posted adjusted earnings of 52 cents per share for the fiscal second quarter ended August 1, exceeding the 48 cents analysts had projected, according to LSEG data. Revenue came in at $3.7 billion, down 2% from $3.73 billion a year earlier and slightly below the $3.69 billion consensus estimate. Net income jumped to $501 million, or $1.38 per share, from $216 million, or 57 cents per share, in the prior-year period. The market's enthusiastic response suggests investors are willing to look past the top-line shortfall and focus on the profit beat, the margin improvement, and the decisive action on Old Navy leadership.
Francis brings significant retail leadership experience to the role, having served as strategic advisor to Walmart's c-suite and board for a decade and supported the world's largest retailer in growing nearly $200 billion in revenue. As reported by Reuters, he also served in marketing and operating roles at DreamWorks Animation and JCPenney, along with a 26-year career at Target, where he held the position of EVP and Chief Marketing Officer for more than a decade. According to Bloomberg, Francis is known in the industry as a marketing expert, having helped Target popularize the concept of "affordable luxury" and successfully launched collaborations with designers. At Walmart, he helped develop marketing strategy during periods when the retailer struggled to grow sales in the U.S. Francis was appointed chief customer officer at Old Navy in May and brings extensive retail leadership experience to the position.
The quarter revealed a stark divergence across Gap's brand portfolio, with the namesake brand delivering exceptional performance while Old Navy continued its decline. Company-wide comparable sales rose about 10% in the quarter, but Old Navy's comparable sales fell 4%, marking its first decline in 12 quarters and representing a sharp reversal from the 2% growth recorded in the same period last year. As reported by The Economic Times, Old Navy has struggled to gain traction in select women's apparel categories in recent quarters, with management attributing approximately three percentage points of comparable-sales pressure to women's summer categories. The Gap banner delivered comparable sales growth of 10%, marking its 11th consecutive quarter of positive comparable sales, outpacing the 8.6% growth analysts anticipated. Banana Republic also showed momentum, with comparable sales up 3% and net revenue rising 1% to $478 million, representing its fifth consecutive quarter of positive comparable sales.
The company's gross margin expanded 20 basis points to 41.4%, a result the company attributed in part to a substantial tariff recovery. Gap received $95 million in tariff refunds during the quarter and used the funds to lower prices on select merchandise, with the remainder of the refund expected in the third quarter. Adjusting for one-time items, including approximately $512 million in total tariff refunds, the company reported the 52-cent adjusted EPS figure. Looking ahead, Gap raised its full-year adjusted earnings guidance to a range of $2.35 to $2.45 per share, up from $2.30 to $2.40 previously and above the $2.34 analyst estimate. However, the company narrowed its fiscal 2026 sales growth outlook to a range of 1% to 1.5%, down from its prior forecast of 1% to 2%, citing economic uncertainty. For the third quarter, Gap guided to revenue growth of 1.5% to 2.5% year over year, with gross margin expansion of 25 to 75 basis points and slight leverage on operating expenses.
The market's reaction highlights the importance of Old Navy to Gap's broader turnaround, as the brand is the company's biggest banner, meaning a sustained recovery could have an outsized impact on overall sales and earnings. According to The Economic Times, investors are valuing Gap at a relatively modest multiple, with its forward 12-month price-to-earnings ratio standing at 8.33, compared with 8.94 for American Eagle Outfitters and 11.93 for Urban Outfitters. "The appointment of a new Old Navy leader underscores management's focus on stabilizing performance at the company's largest banner," Jefferies analysts said in a note. However, analysts note that while Gap should be able to end the full fiscal year on a positive sales note, it needs to get the big engine of Old Navy whirring again to keep advancing at a convincing pace.
