Gap Stock

[Audio Gap] on the Gap brand. I mean, I think you have all watched our story. You're all familiar with our brand. I think Three years ago, if we said Gap brand was going to be one of the fastest-growing brands and trending brands on TikTok, I don't think anybody would have believed us. But here we are.

And I think it's a testament to the execution of our playbook. Our team, in particular, has been relentless and focused not only from a product perspective, which you've seen get enhanced, but as well in executing against that playbook with culturally relevant narratives.

I think when you look at our product, the culturally relevant storytelling that we've been doing and the drumbeat of that experiential moment that ultimately drives traffic and drives interest and drives conversation, which is incredibly important today when you look at consumers and how fast they migrate through storytelling, we need to be at the speed of culture.

And I think Gap has delivered that. This is our 11th consecutive quarter of growth. It's our second double-digit quarter, which we're incredibly proud of. We have some really great statistics as well from the products that we've been delivering and the categories that we've been focused on.

A couple of years ago, even before we spoke to you, we were the #10 denim brand in the country, which we thought that was pretty good as top 10. Today, we're now 6. So that's a big climb when you're talking about those rankings.

Other really strong facts as well. Kids and baby, we were 6 last year. We're now the fourth largest kids and baby business our customer file is also growing. And in that file, we also see the who of that. So we're attracting Generation Z, which is very exciting as well.

So we have a new generation that's entering into Gap while we're preserving the existing appeal. And that's a careful balance, love the one you're with and try and attract new customers. And I think The Gap case study is one that we could all take a look at as we do within our portfolio and recognize that, that methodology is really well.

Really good other statistics. Traffic is increasing. AUR is increasing. The units are increasing. All of those metrics that really indicate health the brand are happening. We've got more full-price selling, which is incredibly important.

Again, if you remember going into a Gap several years ago, it was more about price than it was about product. Now really, the product is telling the stories that we want to tell. So we have healthier margins, which is really obviously helping the overall P&L.

And hopefully, you see what we see. Gap is in the Zeitgeist. It is part of the cultural conversation. And through that, we're attracting incredible partnerships. You see a lot of collaborations coming from Gap. There's something happening every couple of weeks.

By the way, that's with great intent, but we've got super influencers and great tastemakers and all of the attractive ways that we're driving cultural relevance that drives revenue. We just launched GapBag, and we're very excited about that, which just has a great display at [ Rockefeller ] Center. I think it just came down as Fashion Week ends. We launched Gap fragrances, which you've got a sample piece there, which we're excited about.

But ultimately, I think when you look at how the playbook has been executed by Gap and our Gap team, it just shows the power that we have in our portfolio. And it shows that we can do this. We're growing our share in those destination categories that we believe are important. We're growing our customer base, which lends well to the future proposition of the brand.

We're expanding our distribution. We're expanding categories and ultimately on pace to execute that long-term growth model that we believe the brand has as potential going forward.

That's great to hear. Let's turn to Old Navy, which the brand had a little bit of a tougher summer. You mentioned that trends had improved into August. What gives you confidence that the brand is getting back on track?

And you also announced new leadership at Old Navy. Can you tell us a little bit more there? What changes can we expect? And what's the timeline for applying the playbook to the largest brand in the portfolio?

Yes. Well, first off, it is important to take a step back and recognize that this was the first comp decline in 11 quarters. So we have actually been making progress on Old Navy, and we feel good about Old Navy in general. It is very clear, and we've been very transparent.

We missed the seasonal categories. I think -- I wake up in the middle of the night saying that phrase, by the way, because it's just constantly something that we don't feel good about.

But the good news about it is that we've diagnosed it. It is, to some extent, a bit transitory. The transitory drivers really is what we fell short of in the first half. Dresses just didn't appeal to our consumer for the most part. We had a very big assortment of everyday dresses, and the consumer really wanted the occasion dresses. So it wasn't that we didn't have the right dresses, we just had too many of those stresses.

In the context of the other categories, it was inventory mix issues. The product actually worked. We just didn't have enough of it worked. So the good news in that context is it was very clear. It was diagnosed. We've improved product and assortment mix as we move forward.

The more that we move forward, by the way, by the day, seasonal categories get less and less important for us as we look at the back half. We've already seen the customer respond to our product offerings. Our marketing has been totally rewired in the context of that, to create more sharper price points and more value orientation with, of course, the Old Navy narrative that keeps our brands really relevant.

Our denim category, active category, kids and baby; these are the areas of strength for our brand and the areas that you're going to see more and more marketing as the weeks go by and ultimately become the important categories that drive the back half.

I've been incredibly energized by the way, on the Cardi B campaign. And don't worry, we have a little clip of it. So if you haven't seen it, which would surprise me if you haven't seen it. But if you haven't seen it, we have it. But it is an example of the rewire that we did last quarter, learning from what our marketing drove in the last quarter, which, by the way, was with Paris Hilton, drove incredible engagement, but didn't drive the traffic.

So measuring what worked and what didn't work. What didn't work in that campaign was we weren't as product-specific as we needed to be and as price-specific as we needed to be.

And so we rewired the Cardi B campaign to do just that, and it's resonating. It's obviously got a greater focus on product and value. It still holds the tongue-in-cheek playful narrative that is Old Navy, but without talking about it, why don't we just take a quick look at it?

[Presentation]

Yes. See, it's all Navy baby. You can't help but say it. But what's been exciting is it's resonated really well. In fact, we moved from denim, which we started with, and we extended that into knits. So if you haven't seen it, probably it's on our site, but we've done a lot of marketing around Cardi B's cardigan, no-brainer. It's done incredibly well. I think we sold over 500,000 units in a very short period of time.

So we know this flywheel can work. We're seeing it work in real time, and we're excited about what the back half has for us. A lot of work to do. There's no doubt about it. But ultimately, we know how to do this, and we're seeing the indications of that success story.

We did also roll out our beauty line as well, both third party and our own line, which is rolling into stores. Fanatics, a great partnership, sports obviously on the forefront of all of our minds as we've already just finished the U.S. Open. But ultimately, sports and fashion are becoming a bit synonymous. And so we have a great partnership with Fanatics that we recently launched and product is rolling out indoors.

We've got a lot more announcements to come. So a lot more heat around Old Navy. So I will tell you, I'm proud of the progress Old Navy has made over the past several years.

You did mention the transition of leadership. We have had a very smooth and continue to have a very smooth CEO transition. I often say in these chapters, what got us here won't get us there. And we're at a really exciting juncture for Old Navy.

The baton pass from Haio to Michael. Michael Francis joined us if you recall, in early spring, came in as a consultant for us, so the swimming in the waters. He then took on the Chief Customer role, working side by side with Haio and really understanding the insights and the marketing organization various other different parts. And then we just announced the transition plan for Michael Francis to become the CEO of Old Navy effective on November 2.

But ultimately, rocking and rolling, if you will, on a day-to-day basis. In fact, he had a real hand in the Cardi B work, and I've worked very carefully with Michael over the last several months. feel really confident that he's the right guy at the right time.

For those of you that don't know enough about Michael, he's got incredible big box retail experience as the CMO of Target back in the day where Target became [ Target ]. He then had a really exciting chapter with DreamWorks, which again leads well into our narrative around Fashiontainment and brand storytelling and creating content that really connects with consumers. And then he spent the last 10 years working with Doug McMillon at Walmart.

So really a great foundational background. And as the #1 specialty retailer in apparel, that type of experience is going to be incredibly important for us. And we believe Michael is going to be the right talent for us to unlock the next chapter of the brand.

That's great. Let's turn to some of the accelerators that you talked about earlier in the portfolio. Last year at our conference, you announced your expansion into beauty and accessories. How are these initiatives progressing? And what is the timeline for scaling these businesses?

We did. So the good news is we said it last year, and now it's in front of you. So that's already a lot of progress. But as we shared, based on insights, we know these categories are important categories in our consumers' lives. There are also categories that we've been in before. So it's not foreign language to us. We've had a fragrance business, we've had an accessory business. We've had some bags, we've had some belts. We've been in this business, but we haven't done it with real strategic intent.

And so to the credit of the team, we really studied our consumer, we studied these categories. We brought in experts from those industries, acknowledging we need experts to surround us. to actually execute with excellence to the extent that the authenticity that we need to have to win in these categories is there with the talent and the interpretation of what is the Gap fragrance, what is Gap accessories? How do our brands translate to consumers with a meaningful distinctive point of difference?

Beauty, as you know, it's incredibly resilient. It's one of the biggest and fastest and most successful categories in the U.S. It's the highest, actually, growth category in our checkout lanes. And so as we study what works in our checkout lanes and Old Navy, beauty is the #1 category. So offer more choice, offer more depth, offer more assortment and ultimately, we'll win the consumer.

Accessories as well. It's a key element in wardrobing. I mean everybody has some form of bag today. And in that context, you're also complementing it to what you're wearing. And so there really is a natural wardrobing opportunity for us to extend our brands in a more relevant way in accessories. It's a natural extension of apparel.

We've had some great success stories with pockets in our portfolio on accessories this year as well. We just, of course, launched the Bag business. We recruited best-in-class industry talent in both categories that are really focused on the strategy.

And while it's early in our days, last year, we told you we were launching now you're experiencing the launch. That is in the build momentum phase. So not a lot of material impact in the short term. But as we get to that accelerated growth phase, we really do believe these will be really meaningful categories for us for long-term value. So pleased with the early progress.

Excellent.

There's some pictures actually. Also, the Gap fragrance, which is a collection of fragrances. You see here, by the way, the #1 fragrance is Dream right now, but you've got an opportunity to test and enroll all of them. We've had really strong responses to them.

Last month, of course, we rolled out the Old Navy Beauty Collection. Here, you see some of the flavors also Splash, Vanilla Crush, various other really tested well fragrances.

But it is how our consumer shops. We see her checkout out of our checkout lanes and select beauty. So now that she has more choice, we believe that there's real opportunity here. And it also adds to the basket, which is a really exciting add additional purchase as she experiences our story.

Oh, here's the best. We set up an 18-foot Gap Five Pocket Tote bag here in Fashion Week, which was a really exciting statement for us. It was the buzz of Rockefeller Center, and it was the buzz in Fashion Week. Reed Krakoff, who is leading our accessory business, really incredibly well-known and experienced accessory/brand creative director, really figured out how to express and create distinction for Gap accessories, which is an exciting part.

It's not just a bag. It's very much a Gap bag. These are iconic silhouettes, they're drawn from inspired iconic silhouettes and signature styles from Gap. We've got the hoodie tote, the 5 pockets out. I encourage you to take a look at our site, look at our stores, you'll see them.

Looking ahead, we've got some other new additions, product drops, great marketing that's going to solidify this category and gain momentum, by the way, across both categories.

And we believe while these categories are in the early stages, not only do they represent great incremental volume for us, but they're also margin enhancers. I mean these are great margin categories for us as we look to expand margins. We think that there's meaningful opportunity for incremental growth.

That's great. You're also building some new capabilities in Fashiontainment. What is the opportunity that you're hoping to unlock here? And how should we be measuring the progress?

Yes. Well, so last year, we announced beauty and accessories. And throughout the course of this year, we've been talking about Fashiontainment. And a lot of people ask me, what do you mean by Fashiontainment? What's Fashiontainment?

The most simple way to say this is brands, our stories, and we are the storytellers. And I think you could see that come to life when you look at some of the work that we've done, putting our brands in the center of culture and cultural conversation.

I mean when you look at the music videos that we've done, whether that's Malcolm Todd, Dancing On My Own or Katseye, which by the way, we're up against and continuing to perform. We've done incredible work with Young Miko, which was also another music video, literally a Gap production; these are not ads, they are content and they're creating virality, and they're creating conversation. And so it is a form of entertainment.

And how that starts to personify on multiple platforms with our portfolio is the work of the work and what is, if you will, Fashiontainment. Fashion is entertainment. And so being more deliberate about it is what the structure and what the talent that we brought in will intend to do.

In addition to that, entertainment is also a lot of what drives traffic to stores. And so in that context, following the entertainment calendar, that's not something that our industry or portfolio has necessarily done in the past.

And with our experience that we have in the entertainment community, Pam Kaufman, who joined us as our Chief Entertainment Officer from the entertainment community, we've got fantastic relationships in the community example of Disney. We have an incredible DTC deal with Disney, we're their #1 DTC licensee.

We've expanded that business tremendously over the course of the last couple of years. And there's a lot of tentacles in working with Disney that we are starting to magnify. But there's other entertainment studios as well. And so following the entertainment calendar, picking the right merchandising narratives will drive traffic and interest and volume to our stores. And it's another form, if you will, of Fashiontainment.

Pam Kaufman, who leads the Fashiontainment organization, she is an expert in the space. She believes that our brands could extend into relevant categories, certainly beyond apparel. But ultimately, I think when you think about Fashiontainment, watch the storytelling we do through our product and through our content, and we really do believe that it will be a growth enabler for our brands for the long term.

That's great. You just mentioned long-term enablement. Let's talk a little bit about how you view long-term value creation at Gap Inc. How should we be thinking about that opportunity at Gap based on all of your focus areas today?

So what I hope that you all start to feel and see is the consistency in which we present and then deliver. And in that context, through our phased transformation and through that narrative of fixing fundamentals to the beginning of building momentum to the opportunity that we all see in accelerating growth, I think that is the that we made to each other at Gap Inc., and we're making to the investment community.

We believe that at this stage, continuous improvement is a really foundational important point to [indiscernible], doing what we do better every day. And that means growing that apparel business low single digit. And in the context of what we've proven, which is financial and operational rigor, running that middle of the P&L with more discipline and driving that bottom line to continue to increase that that's the model.

Then when you layer on these accelerants like accessories, like beauty, like Fashiontainment, like licensing; you could start to see the incrementality and what that could mean over time. And as we get to that accelerated growth phase, that's where we really see the opportunity to unlock real value in this portfolio.

I'm also really confident in our people. The culture and the cultural progress that we've made over the last several years is energizing. Our people are energized, they're good at what they do. They want to win, which feels good when you're on a team that's striving for excellence.

And I believe that, that, over the course of our progress, will generate strong shareholder returns, will create an employee base that's happy and excited to be part of portfolio and team that matters more to consumers, that's part of the cultural conversation. We're proud of the progress that we made, but we're more excited about the opportunities ahead.

Richard, we're about out of time. Any closing comments or thoughts that you'd like to share with the audience?

I think it probably is a repeat. I think as you look at us as you study us, and I know some of you have studied us for a long time; I think what you're starting to see is our portfolio has strength. These are truly iconic American brands that shape culture. And we're revitalizing them in a way that is relevant for consumers today, but yet not abandoning those who love us. And so that's a careful art.

And again, we chose the language to perform while we transform. And we would love to perform faster and better, but we're careful, we're curated, we're disciplined. We're delivering and doing what we say we're going to do.

We do believe that we've got the right foundational strategy in place. Our core business and continuous improvement, coupled with that financial and operational rigor that you see throughout our P&L; is really driving what we believe is a successful model. Strong cash flow, strong balance sheet positions us really well as we move into this next chapter.

We're very excited about the opportunities ahead. Obviously, the new categories are exciting, but we're really excited about the core. We're excited about what it can mean, the strength that we have in specific categories, as I've shared with you, some of these market share data and where we rank in [ Circana ], we believe there's a lot more opportunity for growth and ultimately, long-term value for our shareholders.

So thank you, by the way, for all of the interest and the consideration and the questions that we get in our individual calls. I hope you could appreciate the transparency, which we're working with but ultimately, the excitement and energy that we have for the future.

Thank you so much for coming, Richard, today. .

Thanks, Brooke. Thank you for all in the audience.

Good afternoon, ladies and gentlemen. I would like to welcome everyone to the Gap Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions]

I would now like to introduce your host, Shirley Martin, Senior Director of Investor Relations.

Good afternoon, everyone. Welcome to Gap Inc.'s Second Quarter Fiscal 2026 Earnings Conference Call.

Before we begin, I'd like to remind you that the information made available on this conference call contains forward-looking statements that are subject to risks that could cause our actual results to be materially different.

For information on factors that could cause our actual results to differ materially from any forward-looking statements, please refer to the cautionary statements contained in our latest earnings release. The risk factors described in the company's annual report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2026, and other filings with the Securities and Exchange Commission all of which are available on gapinc.com.

These forward-looking statements are based on information as of today, August 27, 2026, and we assume no obligation to publicly update or revise our forward-looking statements. Our latest earnings release and the accompanying materials available on gapinc.com also include descriptions and were available reconciliations of financial measures not consistent with generally accepted accounting principles. All mark share data referenced today will be from Sircana's U.S. apparel consumer service for the 12 months ending July 2026, unless otherwise stated.

Joining me on the call today are our Chief Executive Officer, Richard Dickson; and Chief Financial Officer, Katrina O'Connell.

With that, I'll turn the call over to Richard.

Thanks, Shirley, and good afternoon, everyone. In the second quarter, while the company exceeded our profit expectations, we delivered a net sales decline of 2% with mixed performance on the top line across the portfolio.

While not the revenue outcome we wanted continued operational and financial rigor contributed to gross margin strength.

We also maintained market share, reflecting the continued resonance of our brand portfolio. The Gap brand delivered another exceptional quarter with comparable sales increasing 10% and Banana Republic continued to build momentum, posting its fifth consecutive quarter of positive comps. Athleta's top line remained pressured, though we saw encouraging improvements in inventory productivity. At Old Navy, as we previewed on last quarter's call, seasonal categories continued to weigh on performance.

While we took actions to address this as the quarter progressed, we also experienced a slowdown in traffic, which led to a modest miss versus our expectations.

While this is disappointing, I have confidence in our plans to improve performance in the second half. Over the past quarter, Katrina and I have been deeply involved with the Old Navy team in conducting a thorough review of the business. We have a clear understanding of where our execution fell short and have moved quickly to strengthen our plans, the details of which I will get into in a few minutes. Based on August trends, we are also encouraged by the improvement we are seeing, and we're focused on delivering for the second half.

Beyond our near-term priorities, we continue to make long-term investments to advance our next phase of growth. We continue to expand beauty and accessories while building our fashiontaiment and technology platforms to deepen customer engagement, strengthen our brands and enhance our operations.

We also demonstrated our commitment to shareholder returns through our dividend and meaningful share repurchases in the quarter, reflecting both the strength of our balance sheet and our confidence in the long-term opportunity.

As we factor in our second quarter performance, we are narrowing our full year revenue outlook. At the same time, we are raising our margin and EPS outlook, as Katrina will share shortly. We are confident in the road map we have put in place for the second half and remain focused on disciplined execution and delivering further improvement.

Turning now to our detailed second quarter results by brand, starting with Old Navy. In the second quarter, Old Navy's comparable sales declined 4%. As we previewed last quarter, we expected the women's summer seasonal assortment to pressure performance, and that played out largely as anticipated, accounting for approximately 3 points of the comp pressure in the quarter. In particular, we experienced declines in dresses, shorts and swim, where we made some assortment and pricing decisions that impacted our value equation. What we did not anticipate was the degree to which our marketing would fall short in driving traffic. We are not satisfied with this result and have responded quickly. As we move into the third quarter the headwind from summer categories becomes much less significant. 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.

In denim, we are solidly positioned as the third largest denim brand in the country with great quality denim for the whole family at highly attractive price points, we are building Old Navy as a denim destination. Following strong first half performance, denim will grow in importance during the second half as we build on the momentum we are seeing in newer silhouettes like low rise and baggy while introducing more fashion and choice, all at great value.

In knits, legacy franchises remain healthy while we chase into untapped growth in newer franchises like Hug and Heavy Weight.

In active, Old Navy is the fifth largest brand in the country. With the success we've had and continued innovation, this fall, we are amplifying our presence in the category with the introduction of Old Navy Sport, beginning with an elevated merchandising experience, including approximately 40 shop-in-shops in select stores and storytelling centered on technical innovation and style at an incredible value. Old Navy Sport will become Old Navy's active brand.

In beauty, building on our successful pilot last fall, this week, we launched our Old Navy Beauty Co collection nationwide expanding Old Navy into a destination for everyday essentials from style to beauty. And next month, we are expanding our partnership with Fanatics bringing our first exclusive collection of licensed sports merchandise to customers at Old Navy's Signature value, enabling us to capitalize on key moments in the sports calendar beginning with football season.

In addition to product, we have rewired our marketing strategy to improve traffic trends. Our fall denim campaign featuring music artists and television personality Cardi B, launched earlier this month and is off to a good start, driving improvement in traffic, building on its success this week, we launched Carty's Carty, extending the reach and relevance of the campaign into knits. In addition, as we build excitement and momentum for back-to-school, we have partnered with leading digital creator, Mr. Beast, on a multipart content series highlighting the incredible style, expression and value in Old Navy's back-to-school collection.

With improved execution in August, we have seen the business pick up reinforcing our confidence in the actions we are taking. We are clear on the path forward, and we believe we can drive stronger results from here.

As we execute on our fall plans, we are separately announcing this afternoon that we are advancing a planned leadership transition with the appointment of Michael Francis as Old Navy's new Brand President and CEO, succeeding Io Barbado, effective Monday, November 2. Io is working closely with Michael in an advisory capacity to ensure a smooth transition. I want to thank Io for his leadership and contributions to Old Navy in strengthening the foundation of the brand, scaling our strategic categories and positioning the business for a new phase of growth.

Since the beginning of our transformation, Old Navy has grown its annual revenue by nearly $0.5 billion, further strengthening its position as the #1 specialty apparel brand and retailer in the U.S.

As we look ahead to the brand's next phase, Michael's deep experience in customer-centric brand building and track record of strong commercial execution will be instrumental in unlocking the brand's full potential and I am confident that now is the right time for him to step into this role. Michael has a proven ability to connect creativity, culture and commerce in ways that will energize the business. I've seen this firsthand as we have worked closely together to develop our plans for the second half and position Old Navy to capture the significant opportunity we see ahead.

Now moving on to Gap. Gap delivered another excellent quarter. Comparable sales increased 10%, marking its 11th consecutive quarter of positive comps.

As we continue to strengthen product and storytelling through big ideas and culturally relevant narratives, we are deepening customer engagement and further strengthening the brand. That momentum is reflected in the continued expansion of our customer file and yet another quarter of lower discounting. We also posted another quarter of market share gains. Importantly, GAP's momentum continues to be broad-based. Women's led performance in the quarter, while men's also delivered solid results. Kids and baby also accelerated as customers continue to respond positively to our more elevated product aesthetic.

By category, denim and fleece once again drove the business, underscoring the continued strength of our destination categories.

Gap continues to solidify its cultural relevance with customers, connecting fashion and creativity through compelling collaborations and partnerships. In the second quarter, we teamed up with Hailey Bieber, 1 of fashion's most influential tastemakers, to reimagine 2 of GAP's signature denim silhouettes for a new generation. The Hailey Jean sold out quickly while driving strong traffic and a meaningful halo across the broader business. This was a great start, and there's more to come.

As we look ahead, we are building on our success in elevating core categories while also now investing in growth accelerators to expand Gap's relevance across more aspects of consumers' lifestyles. We ended the second quarter relaunching our iconic Gap fragrance line. Early customer response has been encouraging, reinforcing both our heritage and our confidence in the long-term opportunity in beauty. And we are expanding into Gap accessories, beginning with bags, launching with Fashion Week in September.

Marketing continues to resonate playing into Gap's heritage and music with the latest release of Denim On My Own, featuring musical artist, Malcolm Todd in Gap denim in a reinterpretation of Robin's iconic Dancing On My Own.

In addition, we continue to elevate the customer experience. Our store remodel program remains on track with upgraded stores outperforming the rest of the fleet. We expect to complete approximately 35 remodels this year bringing roughly 1/4 of our North America specialty fleet into our latest concept by year-end.

I'm incredibly proud of the Gap team and what they continue to accomplish. Quarter after quarter, they have demonstrated that when great product is paired with compelling storytelling and disciplined execution, it creates a powerful flywheel of customer engagement and brand momentum.

As we enter the third quarter, we have an exciting pipeline of product innovation, culturally relevant collaborations and brand activations that position Gap to continue its momentum.

Moving on to Banana Republic. Banana Republic delivered another quarter of progress with comparable sales increasing 3%, marking the brand's fifth consecutive quarter of positive comparable sales growth. The quarter reflected broad-based strength across both the men's and women's businesses as customers responded positively with categories like outerwear, sweaters and denim as well as our linen fabrications performing well.

Throughout the quarter, Banana Republic continued to celebrate its heritage as a brand for the modern explorer through elevated product and travel inspired storytelling. Through our Portugal series and partnership with National Geographic host, Anthony Perowski, we reinforced linen as the season's hero fabric and our curated archive drop successfully introduced Banana Republic's heritage to a younger customer through iconic styles.

Banana Republic is demonstrating continued progress while becoming increasingly distinctive in the marketplace, upgraded stores like Century City and Tyson's Corner are delivering a better shopping experience, resulting in customers spending more when they shop with us.

As Banana Republic enters its next chapter, we were excited to welcome Donald Kohler as the brand's new President and CEO in July. Since joining, Donald has hit the ground running and is a combination of operational excellence, merchandising expertise and brand building instincts gives me great confidence and opportunities ahead. Under his leadership, we believe Banana Republic is well positioned to build on its progress.

Now turning to Athleta. Athleta's performance in the second quarter remained challenged with comparable sales declining 12%. During the quarter, we proactively managed inventory tightly while testing and learning selectively with new product launches. This resulted in better inventory productivity with early signs of customer acceptance of newer products like the Journey Travel collection launched last quarter.

As we continue to evolve our assortment, our priorities are clear. We are increasing newness, reducing reliance on promotions and seeking to rebuild customer engagement through better product and stronger storytelling. We have also strengthened the organization with new talent across digital and merchandising to improve execution over time.

With our turnaround efforts still in the early stages, we are continuing to take a measured and disciplined approach to inventory and marketing investments as we continue to assess customer response in the second half.

While this approach may limit top line improvement in the near term, we believe it is important to rebuild the business on a stronger foundation for sustainable growth.

Before I turn the call over to Katrina, with August marking 3 years since I took on the role of CEO at Gap Inc., I want to take a moment to reflect on our transformation journey so far. We are pleased with the progress we've made, while recognizing there is more work ahead. We made a choice to perform while we transform. And the metrics that matter reinforce that we have made fundamental improvements in the business. We are on track to deliver our third year of positive sales growth, led by our focus on strategic categories. As a portfolio, we have gained meaningful market share. We are delivering some of our strongest gross margins in 25 years, and we have significantly improved the strength of our balance sheet while returning meaningful cash to our shareholders.

I want to thank our team for the progress we made and their commitment to becoming a high-performing company. We built a stronger foundation with greater financial and operational rigor, but we know there is more to unlock. And we have conviction in our ability to do so by executing with greater consistency, agility and discipline as we continue our transformation journey.

With that, I'll turn the call over to Katrina to walk you through our financial results and updated outlook for fiscal 2026.

Thank you, Richard, and thanks, everyone, for joining us this afternoon. In the second quarter, we remained focused on performing while we transform. While revenue results were mixed across brands, at the company level, we continue to deliver across several other key metrics.

We achieved a strong gross margin result led by disciplined pricing and inventory management. We maintained SG&A rigor while balancing investments in growth accelerators and capabilities to fuel our future. And with the strength of our balance sheet, we opportunistically accelerated share repurchases while maintaining a healthy dividend and continuing to invest capital to support our business.

While Old Navy underperformed, we've clearly identified the drivers and have taken targeted action to strengthen execution in the second half. Quarter-to-date, we are encouraged by the improvement we're seeing in the business, which reinforces that we are on the right track. At the same time, we remain highly confident in Gap's momentum in Banana Republic's consistency, while we continue rebuilding Athleta.

As we factor in our second quarter performance, we are narrowing our full year revenue outlook, with net sales growth now expected in the range of 1% to 1.5%. At the same time, we are raising our outlook for adjusted operating margin and earnings per share, the details of which I will share shortly.

As outlined in this afternoon's earnings release, our second quarter results and full year 2026 outlook for adjusted gross margin and operating margin exclude a cost of goods sold adjustment tied to an expected net recovery of tariffs previously paid under the International Emergency Economic Powers Act. Our adjusted earnings per share outlook also excludes the related interest impact.

Separately, as previously discussed, our full year adjusted SG&A, operating profit and earnings per share outlook exclude the net gain from a legal settlement and the offsetting charitable donation made in the first quarter.

Now on to our results. Net sales of $3.7 billion decreased 2% year-over-year with comparable sales down 1%. As I previewed last quarter, the spread between net sales and comparable sales included the impact of lapping revenue recognized last year related to the structure of our credit card agreement.

By brand, Gap delivered another outstanding quarter. Net sales up 9%, comparable sales up 10%, driven by culturally relevant storytelling in destination categories like denim, fleece and kids and baby.

Old Navy net sales and comparable sales declined 4%. As expected softness in the women's seasonal assortment was compounded by traffic slowing as the quarter progressed.

Banana Republic had a solid quarter. Net sales up 1%, comparable sales up 3%, with balanced performance across men's and women's, supported by stronger marketing and brand storytelling.

Athleta net sales and comparable sales declined 12%, and we remain focused on disciplined execution as we rebuild the brand profitably.

AUR again grew across our brands with Gap brand also delivering positive traffic and unit growth, providing a clear example of the broad-based strength the reinvigoration playbook can deliver.

Let's continue to the balance of the P&L. Reported gross margin for the quarter was 52.8%, adjusted gross margin of 41.4% increased 20 basis points versus last year. Adjusted merchandise margin expanded 80 basis points, driven primarily by the Gap brand with a partial offset from Old Navy where we were more promotional. As previewed merchandise margins included approximately 30 basis points of benefit associated with our tariff mitigation actions.

We also experienced a slight headwind from the credit card dynamic and higher fuel costs. ROD deleveraged 60 basis points better than expected with timing of certain occupancy expenses shifting into the third quarter.

SG&A for the quarter was $1.3 billion or 34.3% of net sales, deleveraging 90 basis points. As previewed, the deleverage to last year was driven by the timing of investments in growth accelerators and capabilities.

Second quarter reported operating margin was 18.5%. The adjusted operating margin was 7.1%, down 70 basis points compared to last year as gross margin expansion was primarily offset by the timing of investments, as I just outlined.

Reported earnings per share were $1.38. Adjusted earnings per share were $0.52 versus last year's earnings per share of $0.57.

Before I move on to the details of our cash flow and balance sheet, I would like to reiterate our capital allocation framework. Our approach remains disciplined, leveraging the strength of our balance sheet and robust cash profile to enhance long-term shareholder value.

Our first priority remains investing in the business through high returning capital investments. Second quarter capital expenditures were $154 million, bringing year-to-date investments to $289 million. We continue to expect approximately $650 million for the full year, primarily for new stores and remodels at Gap and Old Navy along with technology and supply chain investments.

Our second priority is to pay a growing dividend. We paid $62 million in dividends in the second quarter and the Board has approved a third quarter dividend of $0.175 per share.

And our third priority is share repurchases to drive earnings accretion. In addition to completing the previously announced accelerated share repurchase program, we repurchased an additional $200 million of stock in the open market in the quarter, bringing year-to-date repurchases to over $600 million or 26 million shares. Approximately $400 million remains under our current authorization.

We ended the quarter with $2.5 billion of cash, cash equivalents and short-term investments on our balance sheet, up slightly to last year. Year-to-date net cash from operating activities was $550 million, and year-to-date free cash flow was $261 million.

Inventory discipline remains a priority. Quarter end inventory at cost was flat year-over-year. On a unit basis, inventory was up 4%, reflecting higher in-transit inventory largely tied to geopolitical disruptions.

Now let me turn to our outlook. Our outlook reflects continued disciplined execution as we work towards a third consecutive year of profitable sales growth. As always, we're taking a balanced view factoring in what we currently see in the consumer and macro environment, which is largely unchanged. And while remaining mindful of potential volatility ahead in energy prices and U.S. tariffs.

Before I get into the details, I want to provide an update on our tariff assumptions. Let me unpack the moving pieces around tariff rates, and then I will walk you through how we are factoring this into our gross margin outlook for the year, which remains largely unchanged.

Our prior outlook in May assumed 10% tariff rate from February 24 through July 24, under Section 122 before returning to a high-teens tariff rate for the balance of the year. Following the Section 301 announcement on July 23, 2026, we are now extending that 10% assumption through the end of August, which provides approximately $15 million of incremental net tariff relief to the year, which will be realized primarily in the fourth quarter. If the current rate of 10% holds through the end of the third quarter, we estimate it would provide an additional $35 million benefit to the year.

Turning to the specifics of our outlook for fiscal 2026. Starting with revenue. As noted earlier, we now expect full year net sales growth of 1% to 1.5% and with comparable sales roughly in line. By brand, at Old Navy as a result of a slightly more challenging second quarter, we now assume comparable sales are flat to down 1%. And with sequential improvement in the second half as our targeted actions take hold. With the momentum we are seeing at Gap brand, we now expect comp growth in the high single to low double-digit range. Banana Republic is expected to post another year of growth with comps in the low single digits. And at Athleta, we are taking a measured approach to inventory buys as we introduce more newness in the back half, allowing us the flexibility to read and react to new product receptivity. While the teams are striving to do better, our outlook for Athleta assumes full year trends remain similar to the first half.

Turning to gross margin. We are raising our adjusted gross margin outlook as we incorporate incremental tariff relief from Section 301 as referenced earlier. We now assume our adjusted gross margin will be up slightly versus the prior year. Tariffs are now expected to be a slight benefit incorporating our largely unchanged view of the net impact of IEEFA tariffs, the Section 122 benefit that we have reserved and the more recent Section 301 benefit of approximately 10 basis points that we are flowing through.

Outside of this, our margin outlook is unchanged. Merchandise margins are expected to expand year-over-year, reflecting a balanced plan of higher AURs through better sell-throughs and lower discounting, while ROD is expected to deleverage approximately 50 basis points.

Moving on to SG&A. We remain committed to delivering $150 million in cost savings this year as part of our ongoing push for efficiency. Part of that will offset inflation with the remainder funding growth initiatives. Consistent with prior guidance, we expect full year adjusted SG&A as a percentage of sales to be roughly flat year-over-year with leverage in the second half as we lap last year's spending on strategic initiatives and elevated incentive compensation, which was weighted toward the third and more heavily fourth quarters last year.

Taking this all together, we're pleased to be raising our adjusted operating margin outlook slightly to 7.4% to 7.6% for the full year versus 7.3% last year, reflecting continued rigor and discipline across the P&L in addition to tariff benefits related to Section 301.

Adjusted interest income is now expected to be approximately $20 million skewed to the fourth quarter, given the expected tariff refund, and we expect a tax rate in the range of 25% to 26%.

Adjusted EPS is now expected to be $2.35 to $2.45, up 10% to 15% versus last year, an increase from our prior outlook, reflecting our improved gross margin outlook and a lower weighted average share count of 367 million shares following second quarter repurchase activity.

Now let me turn to our outlook for the third quarter of fiscal 2026. The quarter is off to a good start, supported by a sequential improvement at Old Navy. With this in mind, we expect net sales in the third quarter to increase 1.5% to 2.5% year-over-year with comparable sales underpacing net sales by approximately 50 basis points. Our current trend supports the low end of our outlook, but with a range of outcomes by brand that could deliver better. This assumes continued strength at Gap and growth at Banana Republic with Athleta trending similar to our first half performance.

For Old Navy, we expect a comp range of roughly flat to down 1%. Current trends are in line with the range, reflecting meaningful sequential improvement to our second quarter performance as the impact of the challenged summer seasonal product abates and new fall marketing and product resonates more strongly.

With peak selling periods still ahead and as newer initiatives like Old Navy Sport, beauty and Fanatics launch and build through the quarter, we see the potential for further improvement. We expect the third quarter gross margin to be up 25 to 75 basis points compared to last year's gross margin of 42.4%. Tariffs are expected to be an approximately 150 basis point benefit with 50 basis points related to lower tariff rates under Section 122 and the balance driven by our mitigation strategies. Consistent with prior expectations, half of the relief from Section 122 is expected to fund higher fuel costs.

With regards to the balance of our merchandise margin profile, we expect the margin to be flat to down modestly as we leverage margin strength in Gap brand in addition to the remaining half of the Section 122 benefit to make assortment and pricing adjustments at Old Navy to strengthen second half performance. We believe the brand's fall assortment now better reflects the category mix, fashion balance and value proposition that our customers look to us for which is supporting our confidence in a sequential recovery in the second half. ROD is expected to deleverage approximately 60 basis points.

Last, we are planning for SG&A as a percentage of net sales to leverage slightly as we continue to exercise expense discipline while lapping slightly higher third quarter incentive compensation last year.

In closing, our outlook reflects our best assessment of the business today, and we are focused on disciplined execution. With peak selling periods still ahead and exciting new initiatives building, we're driving for continued improvement in the second half. Across the organization, our teams are operating with urgency and a clear determination to win. I remain confident in our strategy and in our ability to deliver sustainable value for our shareholders.

With that, we'll open the line for questions. Operator?

[Operator Instructions] Your first question comes from the line of Dana Telsey with Telsey Group.

Certainly good to hear about the continued double-digit increase at the Gap brand. On the Old Navy brand where it seems like you've been speedily making enhancements to drive the business, what are the markers that you're looking for to show improvement? Is the women's seasonal? When will you -- when will that category? Are you out of the inventory? Is there still more? And with the lower traffic that you mentioned in the stores, marketing activations, given what you do with the Gap brand, how are you seeing it differently than in the past?

Thank you, Dana, and good to hear you. First of all, we were excited, as you can imagine, with another standout quarter at Gap, delivering double-digit comps as well as the 11th consecutive quarter of positive comp growth is a really great indication that the playbook is being executed incredibly well, and we're gaining momentum.

As it relates to Old Navy, we just didn't execute well on our seasonal assortment. Sales have improved in August as we've set fall product and the seasonal categories are behind us. So it is reinforcing that we're on the right track. When we double-click into Old Navy, we're entering into the third quarter with seasonal product behind us. And the impact that we have in that context, denim, active, sweaters and knits become much more meaningful contributors, denim was an area of continued strength in the second quarter, and we've been building on this with more fits and fashion at great value.

Now in the context of marketing, as the second quarter progressed, the summer marketing was not generating the traffic that we expected. And ultimately, with those learnings, we've rewired our fall marketing campaigns to ensure that we're more connected to our top product ideas. August is already demonstrating really significant improvement. You could see our Cardi B. campaign right now is our most viewed campaign in Old Navy's history. But more importantly, we're seeing this translate into improved traffic, strong conversion in women's denim. And we're excited with the results. We've also, in relation to traffic, built a parallel campaign with Mr. Beast. He is the #1 YouTuber in the world, over 500 million subscribers for our back-to-school campaign, which is resonating.

So in sum, I'm very encouraged with the improvement that we're seeing in the business in August. And with the strong products and programs in place moving forward, I feel really good about our plans.

Your next question comes from the line of Alex Straton with Morgan Stanley.

Congrats on a nice quarter. I wanted to focus on profitability. It's very strong even with Old Navy doing that more challenged comp. So can you just talk about how you're able to maintain such strong profitability levels despite this more challenging quarter for Old Navy? Maybe just some detail by brand would be helpful.

Alex, this is Katrina. I'm happy to take that. So as you noted, we were very pleased to deliver gross margin up 20 basis points year-over-year, and that was higher than the expectation that we had previewed Merchandise margins were up 80 basis points.

Now 30 basis points of that was tariff, and that was largely utilized to fund the fuel headwinds we had in the quarter. But as you say, we were able to really balance the strength of our portfolio, really broad-based strength in gross margin, particularly at Gap, but also at Banana Republic and Athleta to give us the room to do the promotions we needed to do at Old Navy to be able to really successfully clear through the seasonal product. And we've largely gotten that seasonal product behind us. And all of that allowed us to still deliver merch margins up. Within the total margin, as we talked about, ROD deleveraged about 60 basis points. Some of that's timing and some of that is the dynamic we have previewed. So all in all, strong margins.

Now as I think about what gives me confidence heading on as we go. As Richard just previewed, Old Navy is off to a good start. That 3-point headwind from seasonal product is already behind us and showing up in the results, which is showing us that our strategies are starting to take hold, and we're seeing much more improved performance as we head into the third quarter.

Your next question comes from the line of Matthew Boss with JPMorgan.

So Richard, could you speak to the tale of 2 brands between the Gap and Old Navy in the second quarter? And then if you could just elaborate on August. Any change in double-digit strength at the Gap? And maybe just a little more on the time line for stabilization and reacceleration in your view at Old Navy?

Sure, Matt. So first, Gap's execution of the playbook just continues to drive exceptional results. And this has really been through compelling product with distinctive cultural relevance storytelling. It's notable. This is our 11th consecutive quarter of positive comps. And as you mentioned, it's our second quarter of double-digit comp growth. We've seen great strength across women's, men's, kids and baby. In particular, we strengthened our market position in kids and baby. We rose to the #4 rank from the #6 rank. We've also gained share and rank in fleece, where we're also now the #6 brand. Even more importantly, our customer file continues to grow. And we've been particularly doing a great job attracting the Gen Z customer, while preserving what we'll call the multi-generational appeal that Gap has. We're gaining strength across categories. I think the partnerships that we're bringing, particularly the 1 with Hailey Bieber most recently was a really strong success. And so as we enter the third quarter, we've got a robust pipeline of product and marketing and we plan on continuing the momentum that the brand has delivered and on track for the rest of the year.

Now Tale of Two Cities, to some extent, but I think it's important recognizing maybe had 6 consecutive quarters of positive comps leading up to this quarter. Certainly, the quarter wasn't necessarily where we wanted it to be. But as I've shared and we've diagnosed, we missed the mark on our summer seasonal assortment, which we also previewed last quarter.

In addition, we've also mentioned that our marketing fell short driving traffic. The good news, as we look in terms of entering the third quarter, we're in a much better place from a product point of view. The impact that we've had on our seasonal categories reduces significantly categories like denim, active sweaters, knits where we have strength become even more meaningful contributors. You could see our current campaign right now if Cardi B. is driving not only the most viewed campaign in Old Navy's history, but we're also seeing it translate again into improved traffic and strong conversion in women's denim. I mentioned the back-to-school campaign. We were off to a great start. We have a great partnership with Mr. Beast, as mentioned as well, it's resonating. So I've been really encouraged with the improvement that I'm seeing in the business into August. And with the strong products and programs that we have in place, I really do feel very good about our plans for the back half.

Your next question comes from the line of Brooke Roach with Goldman Sachs.

Richard, 1 of the items you outlined as a contributor to the Old Navy softness was the need to sharpen pricing. Can you tell us a little bit more about what you've learned here for this customer and the changes that you're making? Is that customer more price elastic or price-sensitive than before?

And then as a follow-up, Katrina, you had talked about $40 million in reserve for pricing last quarter. It sounds like that's getting deployed at the Old Navy brand. How much of that is being used in 3Q versus 4Q? And do you have additional reserve to take further markdown actions should the competitive environment intensify?

Okay. Thanks, Brooke. I'll start, and then Katrina can continue. We see value as a perception based on product and pricing. When we deliver the right product at the right price, the customer responds. And we see that in various different places in our business. For example, in denim, the price value equation is extraordinary, and it's showing up in the results. We also see it with Gap as well as Banana Republic in terms of their performance. But in this case with Old Navy, the seasonal categories in the quarter just didn't really deliver the right combination of style, quality and price.

Moving forward, we've made those adjustments. We feel very good about our fall assortment. We see it already resonating and we believe it represents the great value that we're known for and that the customer is reacting to.

So overall, again, consumers are resilient, granted discerning. But when you get the right product at the right price, they show up and it converts.

And then, Brooke, to answer the balance of your question. So you're absolutely right. We had previewed on the last call that we were holding that $40 million or half the 122 benefit for promotional environment. We are now using that for Old Navy. We went back and looked at the Old Navy assortment for the second half, both looking at the consumer, but also really looking at what we've learned from the front half. And we feel very good that we've made the right changes to the assortment, the category mix, the fashion quotient and the value quotient to allow us to compete well at Old Navy. We've utilized the 122 pretty equally between quarters. But in addition to that, similar to what we just delivered in second quarter, we're also using the strength in lower discounting and better sell-throughs from Gap to be able to use a little bit of that to also deploy towards value at Old Navy. So those 2 levers, the power of our portfolio as well as the 122 benefit are giving us the opportunity to really make sure we have the right assortment at the right value for Old Navy in the second half of the year.

Your next question comes from the line of Jay Sole with UBS.

I want to ask about capital allocation. I think you said you bought back $600 million of stock, somewhat surprising in a good way. But you still have $400 million remaining, 2.5 billion on the balance sheet. Might you continue to buy more stock over the course of this fiscal year, how much -- I mean, would there be opportunities to increase the authorization? You talked to the board about that. And just tell us about the timing of when that might play out.

Yes. Thanks, Jay. As you said, we did repurchase year-to-date $600 million or 26 million shares. Our stated goal was to drive slight earnings accretion. And with our year-to-date repurchases, we've actually driven mid-single-digit accretion, which we think does demonstrate real shareholder value. In the EPS raise that we did, $0.05 of that raise was attributable to the share repurchase we did in second quarter. As you say, we have $400 million outstanding on our current authorization. And as always, we and the Board will continue to evaluate the return of capital to our shareholders just to make sure we're maximizing value.

Your next question comes from the line of Bob Drbul with BTIG.

I was just wondering if you could spend some more time on what you've learned so far with beauty and accessories and just sort of what we should be looking for over the next few quarters with both of those categories and into '27?

Yes. Sure, Bob. I mentioned driving our continuous improvement in our core apparel business because that is the basis for how we're able to enable and accelerate long-term accelerators like beauty and accessories. So we're just getting started across these emerging growth categories. Specifically in beauty, we did relaunch our Heritage Gap fragrance collection in July. We had a really strong customer response very familiar fragrances in some cases and introducing them to a new generation.

Looking ahead, we've got some really great, robust marketing and pipeline with other exciting product drops for Gap that we believe will maintain momentum in the category and continue to grow as we move forward. This week, we also rolled out Old Navy Beauty Co nationwide which we also believe will be a traffic driver for Old Navy. It will also create a more engaging experience for customers. We've started with a great private label collection as well as over 30 third-party brands that will create great excitement and again, long-term proposition for growth for the brand.

In accessories, we're starting with Gap bags this fall, which will be unveiled during Fashion Week. We could not be more excited about it. Reed Krakoff, who oversees our accessory creative has done an absolutely terrific job translating Gap's brand ethos into a really distinctive collection. The collection itself features silhouettes that really draw the inspiration from iconic gap products I will reserve more detail on it because we're really excited to unveil it, but it is going to be fresh and very unexpected.

It's early days for both of these categories. So we're not necessarily anticipating any meaningful financial contribution this year, but each represents a meaningful opportunity to drive incremental long-term growth for the company.

Your next question comes from the line of Lorraine Hutchinson, Bank of America.

I wanted to follow up on inventory. It sounds like in total, you're happy with level. But I wanted to see if you could drill down for us on Old Navy if you've been able to alter the receipts in the way you wanted. Same question on Athleta. And then on the flip side, if at Gap, you're able to chase into the strong demand?

Yes. Thanks, Lorraine. So we did end inventory levels flat. Units were up 4. But as I said, that's really in transit, and that's as a result of what's going on in the world. So overall, we really do remain disciplined.

On Old Navy, we were very purposeful about ensuring that we were clearing through the seasonal product to make sure that we were clean as we headed into the third quarter. And we've also, as I said, really relooked at our fall and holiday assortments to make sure that we feel very good about how we're positioned categorically and with the right quality of fashion and value to compete.

As it relates to Athleta, we're largely taking a very conservative approach on inventory at Athleta. What's interesting is that while that's constraining the top line, it's actually really helping us continue to build on their profitability in the near term, while we really read and react, how the customer is reacting to the new fashion product. And so far, that's been quite good. It's just -- we're being very careful about how we buy it in the near term.

And then maybe lastly, at Gap, yes. We are chasing inventory. The team has developed real nimbleness and agility. And I would say a lot of their success is based on their demonstrated ability to really chase into things that are working and drive these double-digit comps that we've been seeing. So we're pleased overall with the way the portfolio has been managing inventory.

Your next question comes from the line of Mark Altschwager with Baird.

I just wanted to ask a bigger picture on Old Navy. You've given us the seasonal diagnosis and talked about the fixes and you've talked about how Michael helped build the plan for fall. So I take it that the second half doesn't change much here. I guess my question is, if he formally steps in, in November. I guess what changes that? And I guess, what level of confidence do you have that Old Navy is back to a consistent low single-digit comp as we move beyond the fall rather than kind of a flat to down 1 that you're now guiding for this year?

Yes. So first off, speaking about the transition. This was a planned and thoughtful transition. Michael's experience aligns really well with the phase that we're entering for Old Navy. He brings incredible vast experience with some of the largest consumer and retail organizations in the world, Target, Walmart, entertainment companies like DreamWorks, operating in highly complex environments. Michael joined us in May, and I've been working very closely with him on our fall plans. He's already had meaningful impact, including sharpening our product storytelling. The marketing execution you see happening right now. He's had a handprint on and obviously, as he gets more and more versed for the second half. He's going to assume the role officially in November, after which Io will move into an advisory role. They're working very closely together to ensure a continuous and smooth transition. And I think in relation to the Old Navy back on track, we're maintaining our approach and our strategy going forward. We have the right playbook, which we've got proven points on. This is the first negative quarter for Old Navy and 11 quarters. And we've diagnosed it. It's a very specific execution issue in relation to our seasonal challenges. So we believe that we've got the right product and programs in the back half, a smooth leadership transition and the right playbook and team, and we will execute with an expectation to win in the back half and excited about our future.

Your final question will come from the line of Ike Boruchow with Wells Fargo.

Katrina, a question about the model. When you look at the raw deleverage in the second quarter and then the guide for the back half to deliver 60 basis points in 3Q while you're growing revenue, too, it kind of implies the occupancy dollars per foot are up high single digits. I'm just kind of curious because the store base isn't changing what are these investments? It just looks like there's more fixed cost in the COGS line than there typically has been. So I'm just curious if you could explain what investments are going on, on why that's happening exactly?

Yes, sure. We have previewed that ROD deleverages this year. It is a new dynamic for us. I think it represents 2 things. First of all, we've largely concluded closing our underperforming stores. The pace of the closures that we were doing when we were closing 350 stores had provided meaningful benefit to ROD. And now we're modestly opening stores. So that does impact the rod line as the closures abate, and we end up with not that road favorability.

Now it does help us on the sales line. I think you're seeing that this quarter, we have a 50 basis point spread. And by the end of the year, there's no spread. And then hopefully, we'll get to an opening, which starts to benefit sales. So that's 1 thing.

The second thing is we've been slowly taking up our capital. And this year, capital is expected to grow $650 million. So there is a step-up in depreciation. These are, honestly, both short-term and long-term investments, openings, remodels, a lot of the technology work that we're doing around AI to be able to build capability and somewhat in our supply chain. So both of those things come together this year to create the deleverage. The model right now for the year is that ROD will leverage on a mid-single-digit sales growth.

That concludes our question-and-answer session. I will now turn the call back over to Richard Dickson for closing remarks.

Thank you, operator. As we look ahead, our conviction in the long-term opportunity across our portfolio remains unchanged. Our teams are focused on disciplined execution to strengthen our performance. We remain committed to building a high-performing house of iconic American brands while delivering long-term value for our shareholders. Thank you for joining us today.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.

Good afternoon, ladies and gentlemen, I would like to welcome everyone to The Gap, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions]

I would now like to introduce your host, Shirley Martin, Senior Director of Investor Relations.

Good afternoon, everyone. Welcome to Gap Inc.'s First Quarter Fiscal 2026 Earnings Conference Call. Before we begin, I'd like to remind you that the information made available on this conference call contains forward-looking statements that are subject to risks that could cause our actual results to be materially different.

For information on factors that could cause our actual results to differ materially from any forward-looking statements, please refer to the cautionary statements contained in our latest earnings release, the risk factors described in the company's annual report on Form 10-K filed with the Securities and Exchange Commission on March 17, 2026, and other filings with the Securities and Exchange Commission, all of which are available on gapinc.com.

These forward-looking statements are based on information as of today, May 28, 2026, and we assume no obligation to publicly update or revise our forward-looking statements. Our latest earnings release and the accompanying materials available on gapinc.com also include descriptions and where available reconciliations of financial measures not consistent with generally accepted accounting principles. All market share data referenced today will be from Circana's U.S. apparel Consumer Service for the 12 months ending April 2026 unless otherwise stated.

Joining me on the call today are our Chief Executive Officer, Richard Dickson; and Chief Financial Officer, Katrina O'Connell.

With that, I'll turn the call over to Richard.

Thanks, Shirley, and good afternoon, everyone. Before we discuss our results for the first quarter, let me begin with a moment of remembrance for our Co-Founder, Doris Fisher. Doris was a visionary and an extraordinary human being whose brilliance quiet determination and heart shaped everything from Gap Inc.'s indelible influence on fashion and retail to philanthropy to the San Francisco In Gap speak, she was a true original. And she worked tirelessly to ensure that Gap Inc. always did more than cell closes, which inspires our purpose today. We bridge gaps to create a better world. On behalf of everyone at Gap Inc., I would like to extend our deepest condolences to the Fisher family and ensure them that the legacy Doris and Don Fisher created in Gap Inc. will endure.

Now transitioning to our results. In the first quarter, we continued to execute on our strategic priorities, delivering progress across several key metrics. Comparable sales increased 2%, marking our ninth consecutive quarter of positive comps as we once again grew sales across all income cohorts. As the value proposition of our brands continue to resonate we gained market share, reflecting better product, better storytelling and building brand relevance. And we outperformed our gross margin outlook, reflecting continued rigor in execution.

Overall, at the company level, the quarter was in line with our expectations. However, results at the brand level were more varied reflecting both the different stages of their transformation and some brand-specific dynamics. As I reflect on the quarter, with 3 of our 4 brands once again delivering positive comps with standout growth at the Gap brand, we continue to demonstrate progress. Yet we know some of our brands have greater potential, and we are taking action to unlock stronger performance, which I will discuss in more detail.

In parallel, we are also investing more intentionally in our future as we build category adjacencies like beauty and accessories, where we see a meaningful long-term growth opportunity and capabilities such as our fashion payment platform and technology to amplify how we connect with customers and increase productivity. Lastly, we remain committed to being strong stewards of capital as we balance long-term investments with increased capital returns to our shareholders this year. This reflects the growing strength of our balance sheet and strong conviction in our long-term potential. Katrina will share our updated guidance later during the call.

Given the varied performance at the brand level, we are taking a moderated view of full year revenue growth. At the same time, we are raising our outlook for earnings per share reflecting continued financial and operational rigor. While we are not starting out as strongly as we anticipated, we are still early in the year. The teams are motivated to drive better results, and our goal will be to outperform.

Turning now to our detailed first quarter results by brand. Let's start with Old Navy, our largest brand and the #1 specialty apparel retailer in the country. In the first quarter, Old Navy once again grew with comp sales increasing 1% on top of last year's 3% comp growth. As noted earlier, our strategic pursuit of key categories continued to deliver results, particularly across active, denim and kids and baby, all of which posted growth versus last year. Old Navy maintained a top 3 rank in denim and kids and baby and gain share in denim specifically, reinforcing our leadership in these categories.

We were also the only brand in the active category to maintain share within the top 5, reflecting the attractive value proposition we continue to deliver. We also had a number of compelling product announcements that tied into pop culture with the launch of Old Navy's second designer collaboration featuring award-winning Christopher John Rogers, and a special Devil wares product collection capitalizing on growing buzz around the sequel. Overall results for Old Navy were primarily impacted by the women's dress business, where in reviewing the season, we did not execute as effectively and as a result, customers did not respond to our assortment, the way that we had intended.

Entering Q2, the seasonal women's dress business continues to underperform our expectations with weakness visible across the broader seasonal product assortment as well. The team has worked swiftly to address these factors, refocusing our efforts on sharper price points and stronger customer messaging to drive conversion for the seasonal categories. Once these changes began to take hold in mid-May, we saw some improvement, but we are carefully monitoring this and making continued adjustments. While we are encouraged by the recent improvement, we also recognize that this level of performance does not reflect our full potential. There is a clear opportunity to do better. and we are working closely with the team to sharpen our focus and strengthen execution.

As we look ahead into the second half of the year, we have several building blocks in place that give me confidence in our ability to deliver continued improvement. We are seeing strength in denim and active and we expect these key strategic categories to build in prominence in the second half of the year.

We are also rolling beauty out to the full store fleet by year-end. And following a successful winter pilot, we are launching a first-of-its-kind partnership with Fanatics, the global leader in sports licensing. Separately, as we continue to focus on elevating how the brand shows up to our customers, we are excited to announce the appointment of Michael Francis to the newly created role of Chief Customer Officer for Old Navy. Michael is a highly respected brand builder in retail, best known for reshaping the brand experience and building culture shaping moments at Target and Walmart, two of the largest retailers in the country. Throughout his career, he has consistently infused value apparel concepts with lifestyle, aspiration and emotional residents, redefining how customers engage with accessible fashion.

Michael's appointment marks an important step forward as we position Old Navy for its next chapter of building stronger, more meaningful relationships with our customers. In this role, Michael will help sharpen our customer strategy deep and emotional connection with our audiences and bring even greater cohesion and consistency to how we show up across every touch point and every season.

Now moving on to Gap. Gap delivered an exceptional quarter. Comp sales increased 10% on top of a 5% comp last year. This marks the brand's tenth consecutive quarter of positive comps as we continue to lean into our heritage of big ideas and culturally relevant narratives to drive growth. As product storytelling and brand relevance continue to strengthen, we expanded our customer file, reflecting growing engagement across generations and achieved our third consecutive quarter of reduced discounting.

As we continue to execute our reinvigoration playbook, it's incredibly encouraging to see its impact broadening across additional divisions and categories. At the division level, strength in women's and consistency in men's drove the brand's performance in the first quarter, complemented by a notable return to growth in kids and baby, marking a meaningful milestone for The Gap brand. We're encouraged to see our focused turnaround efforts in kids and baby take hold as our amplification of destination categories through collections like my first denim and baby and trend-right fleece and denim offerings for kids builds resonance.

By category, denim remained the key driver of growth in the first quarter as our focus on delivering trend-right product drove another quarter of market share gains. In addition, we also saw strength in fleece amplified by our sweats like this music video, featuring Grammy-nominated singer Young Miko. The campaign significantly outperformed benchmark goals, generating nearly 1.5 billion press and social media impressions and strongly resonated with Gen Z audiences with Gap trending on TikTok within 24 hours of launch.

Founded in 1969 as a brand selling denim and records, Gap has always lived at the intersection of fashion, music and culture. That heritage came to life in a major way this quarter at Cocella, one of the world's largest and most influential music and cultural festivals, through our iconic Hoody House activation. The experience drove strong engagement, selling roughly 10,000 custom hoodies and generating over 300 million social media and press impressions. More importantly, it served as another powerful demonstration of Gap's cultural influence authenticity and growing relevance with a new generation of consumers.

In the first quarter, we continued to reimagine Gap Classics with product collaborations shaped by the distinctive creative lens of Harlem's Fashion Row, Awake New York and Victoria Beckham. With strong consumer response and engagement around the Victoria Beckham collection, we are excited about the momentum this multi-season collaboration can build in the seasons ahead. Entering the second quarter, we are continuing the drumbeat of cultural relevance. Earlier this month, we were thrilled to address Kendall Jenner in a custom Gap studio creation designed by Zac Posen at the Met Gala, showcasing the brand's highest expression of style and craftsmanship on one of the world's most iconic cultural stages.

As we continue to deliver strong product and storytelling elevating our customer experience remains paramount. With strong results from the 2025 remodel program, we plan to remodel about 30 stores this year bringing approximately 25% of the North America specialty fleet into the new concept by year-end. I'm proud of the Gap team for the consistency, creativity and clarity, which they are executing the playbook. With strength broadening across divisions and categories, continued expansion of our customer file, and a growing presence in key cultural moments, Gap is truly building momentum, and we look forward to continuing that in the quarters ahead.

Moving on to Banana Republic. Banana Republic continued to make solid progress in the quarter. Comparable sales increased 2%, reflecting the brand's fourth consecutive quarter of positive comps. Men's and Women's performed well reflecting more balanced growth across the business with strength in key categories, including pants and sweaters. We continue to lean into Banana Republic's heritage as a storytelling brand through the lens of the modern Explorer. This came to life through a collaboration with the Explorers Club featuring an archive reissue capsule, reimagining some of our most iconic styles from the early decades through a contemporary lens. The collection has generated strong engagement and accolades across social conversations, reinforcing Banana Republic's distinct brand positioning.

As you know, I have been leading Banana Republic through its fix the fundamental stage as we conducted a search for the right leader. With the brand now delivering greater consistency, last week, we announced the appointment of Donald Kohler as the new President and CEO of Banana Republic. Donald has an exceptional career journey spanning more than 3 decades with transformative leadership roles across iconic brands such as Calvin Klein, Tommy Hilfiger, Burberry, Ferragamo and Diesel and including more than a decade at our very own Gap brand. Now we are excited to welcome him back to our family.

Donald's operational excellence combined with his natural instincts for great design impactful merchandising and powerful storytelling positions him strongly to lead Banana Republic's next chapter. As I turn over the reins, I want to extend my personal thanks and gratitude to the team. They have done an outstanding job strengthening the brand over the past several years, and I'm excited for what we can deliver with Donald's leadership.

Now turning to Athleta. As we shared last quarter, 2026 is a rebuild year for Athleta. Since Maggie joined as the President in August of last year, the team has been taking steps to strengthen the brand's foundation restoring clarity to its brand purpose, repositioning talent and rearchitecting product and creative plans to better reflect how customers live, shop and engage with the active category today. As we continue to rebuild Athleta, we have been focused on clearing less productive legacy product. We made progress in the first quarter. However, this process is taking longer than anticipated and put pressure on sales leading to a disappointing result.

For the second quarter, we remain focused on clearing the inventory so that we can begin to transition towards a cleaner assortment that better represents our go-forward aspirations for the brand in the fall. As we have worked to clear, we also have been introducing new product at a smaller scale and have seen encouraging results. In the first quarter, our launch of the Journey travel collection in targeted locations saw a positive customer response, driving increased engagement and strong sell-through. We also saw momentum in new leg shapes across key franchises like our heritage elation line. These early reads are helping to inform our product direction and where we are choosing to lean in further in the coming quarters. While we recognize that it will take time for our actions to translate into an improved growth profile, Athleta remains an important brand in our portfolio, and we are focused on rebuilding it for long-term growth.

Now moving on to our investments. For beauty and accessories, we are approaching 2026 as a test and learn year, focus on deepening our customer engagement, capturing insights and leveraging our learnings to inform a confident build over time. In beauty, our efforts this year are centered on our two largest brands, Old Navy and Gap. At Old Navy, as we have shared, we began piloting beauty in the third quarter of last year in 150 select stores, engaging with our customers through various product assortments, pricing strategies and merchandising models to understand how best to meet them in their shopping journey. The pilot provided important learnings that we are applying as we roll beauty out to the rest of the fleet during the second half of this year with a path to scaling the category in 2027 and beyond.

At Gap, we're excited to relaunch fragrance this summer, celebrating heritage sense like heaven and grass with a modern expression through refreshed packaging, updated formulations and elevated storytelling. This represents a step forward in rekindling Gap's iconic appeal in fragrance through a revitalized brand identity and product lineup.

Moving to accessories. This year, our focus is on Gap where we will be launching a collection in the fall that embodies the brand spirit of individuality. I'm energized by what I see in product. It's elevated and delivers great quality at a great price, and we are excited to share the collection with our customers.

Now on to our platform capabilities. Starting with our Fashiontainment platform. We see a broad opportunity across our portfolio to amplify our presence in moments that matter by bringing together fashion with music, sports and entertainment. Sports, in particular, is an influential force shaping fashion and trends. Our exciting partnership with Fanatics is a great example of new ways we are tapping into this new arena, and we will continue to explore additional opportunities tied to major global sporting moments.

In the first quarter, we also relaunched our loyalty program, Encore, transitioning our house file of around 40 million customers from a traditional transaction-based program to a broader customer engagement platform. Technology is another important capability we are investing in. We are a fashion company that is brand-led and intelligence powered. The brands create the demand by executing on the reinvigoration playbook, intelligence enabled by data and AI, empowers our teams to make decisions that drive greater consistency and efficiency. The most important place this shows up in what we call product intelligence, how we design, how we buy, how we allocate and how we replenish. We are leveraging technology and AI to help our teams make smarter merchandising decisions, improve inventory productivity and drive the right value equation for our customers.

Another place this shows up is in the customer experience, making it easier to find the right product, feel confident in the fit and discover what is new and relevant. This includes extending discovery through new AI-powered shopping partnerships including our recently announced partnership with Google's Gemini. We are also deploying AI across our internal operations to drive the productivity that funds our investment agenda without expanding our cost structure. We look forward to sharing more details on our technology investments and platforms in the coming quarters.

In closing, first quarter results speak to continued progress in our transformation, yet we know we need to deliver at higher levels of growth, and the teams are focused on executing to this. At the same time, the fundamentals of our business remain strong, and the rigor we've instilled throughout the organization are enabling continued margin expansion growing cash flow and increase returns to shareholders this year. I want to thank our teams for their resilience and dedication to achieving the full potential of our portfolio.

I will now hand the call over to Katrina to walk you through our financial results and 2026 outlook.

Thank you, Richard, and thanks, everyone, for joining us this afternoon. In the first quarter, we extended our track record of sustained revenue growth. Operational and financial rigor, combined with our reinvigoration playbook drove our ninth consecutive quarter of positive comps, reinforcing the strength and durability of our transformation.

As Richard shared, this was a unique quarter for us as we navigated some variance in our brand performance with Gap brand delivering standout growth, Old Navy coming in slightly short of our expectations, Banana Republic staying the course and Athleta seeing a more challenging quarter. Against this backdrop, I'm proud of how the team has managed the corner, adapting as needed to deliver on our objectives. We achieved our net sales goals, exceeded our gross margin expectations and continue to optimize our cost structure, enabling us to build our brands in the quarter while simultaneously funding strategic investment in our long-term growth accelerators and capabilities.

We also deployed capital strategically, investing back into the business while maximizing returns to our shareholders through a significant increase in share repurchases, complemented by a meaningful dividend increase. We are updating our outlook today to reflect slightly lower sales expectations for the year, reflecting a moderated view of Old Navy. Our operating margin outlook remains unchanged. And despite the lower revenue projections, we are raising our earnings per share outlook, the details of which I will walk through shortly.

Before turning to the details of our results and outlook, I want to highlight that our first quarter and full year 2026 adjusted SG&A, operating profit and earnings per share metrics exclude a $313 million legal settlement net gain and concurrent $50 million charitable donation that occurred during the first quarter. On a reported basis, both are included across these metrics.

Now on to our results. Net sales of $3.5 billion increased 1% year-over-year with comparable sales up 2%. As I previewed last quarter, the spread between net sales and comparable sales was largely a result of lapping revenue recognized last year related to the structure of our credit card agreement.

By brand, Old Navy's net sales of $2 billion increased 1% year-over-year with comparable sales up 1%. Old Navy continued to win in strategic categories, including denim, active and kids and baby. This was partially offset by a weaker customer response to our spring dress assortment.

Gap had a stellar quarter. Net sales of $796 million increased 10% year-over-year and comparable sales were up 10% as the brand continued to demonstrate culturally relevant storytelling in destination categories, including denim, fleece and kids and baby.

Banana Republic's net sales of $431 million increased 1% year-over-year with comparable sales up 2%. The brand delivered its fourth consecutive quarter of positive comps, with balanced growth across men's and women's, fueled by continued elevation in merchandising and storytelling.

Athleta's net sales of $270 million decreased 12% versus last year and comparable sales were down 11%. This was below our expectations as we work through legacy products while we look towards launching a stronger and more relevant assortment. Let's continue to the balance of the P&L.

Gross margin of 40.5% declined 130 basis points versus last year, coming in ahead of guidance. Merchandise margins declined 100 basis points and Rod deleveraged 30 basis points. The 100 basis point decline in merchandise margins reflects an expected headwind from the net impact of tariffs of approximately 200 basis points implying 100 basis points of underlying merchandise margin expansion. This was driven by strength and lower discounting at the Gap brand, combined with better inventory management across the portfolio, partially offset by modest headwinds related to the credit card dynamic I previewed earlier.

Higher fuel costs also had a slight impact in the quarter. AUR increased relative to last year across all brands as we continue to operate with discipline. On a reported basis, SG&A was $972 million. On an adjusted basis, SG&A was $1.2 billion and 35.3% of net sales. As expected, the increase to last year was primarily driven by the timing of planned investments in key growth initiatives and capabilities, including the relaunch of our loyalty program, expansion of beauty and accessories teams and continued investments in technology and our Fashiontainment platform to modernize our brands and operations through next-generation capabilities.

First quarter reported operating margin was 12.7%. On an adjusted basis, operating margin was 5.2%, down 230 basis points compared to last year, primarily reflecting the net impact of tariffs. Reported earnings per share were $0.90. Adjusted earnings per share were $0.38 versus last year's earnings per share of $0.51.

Before I move on to the details of our cash flow and balance sheet, I would like to reiterate our capital allocation framework. Our approach remains balanced leveraging our healthy balance sheet and robust cash profile to enhance long-term shareholder value. Our first priority is investing in the business through high returning capital investments. First quarter capital expenditures were $135 million. And for fiscal 2026, we continue to expect approximately $650 million in investments related primarily to stores, technology and supply chain.

Second, we believe in paying an attractive dividend that grows with net income growth. In the first quarter, we paid $63 million to shareholders in the form of dividends, reflecting a 6% increase in our quarterly rate to $0.175 per share. Additionally, the Board recently approved a second quarter dividend of $0.175 per share.

And our third priority is focused on share repurchases, as previewed last quarter, we have evolved our approach to being more intentional in driving earnings accretion. Aligned with this principle year-to-date, we repurchased approximately $400 million worth of stock or approximately 16 million shares. Looking ahead, we have approximately $600 million remaining under our current authorization, which we will continue to deploy opportunistically as we balance our capital priorities and annual objectives.

Now turning to cash flow and the balance sheet. Our cash position remains strong. We ended the quarter with $2.6 billion of cash, cash equivalents and short-term investments on our balance sheet, an increase of 15% compared to last year. First quarter net cash from operating activities was $213 million, inclusive of the net gain from the legal settlement and the concurrent charitable donation, and free cash flow was $78 million.

Disciplined inventory management resulted in end of quarter inventory levels flat to last year with units down. We continue to be rigorous in our approach to inventory and expect to operate in line with our principle of unit purchases position below sales.

Before I move on to our outlook, I want to thank our teams for their continued focus and resilience. The foundational rigor we have established is allowing us to operate with agility, and our healthy financial position is providing us with the flexibility to be thoughtful in our investments while remaining committed to increased capital allocation and enhanced shareholder returns.

Now on to our outlook. Our guidance today reflects a commitment to delivering a third consecutive year of profitable sales growth, continued operating margin improvement and robust free cash flow generation. As is typically our practice, we are taking a balanced approach, factoring in the visibility we have into the consumer and the broader macroeconomic and geopolitical environment in the near term, while also recognizing potential uncertainties going forward.

Before I share specifics on the second quarter and full year, I would like to discuss our assumptions on tariffs across two areas. First, the benefit from lower tariff rates following the Supreme Court ruling in February; and second, the potential refunds on tariffs incurred and paid for products landed in the U.S. before the ruling.

Let's start with the benefits related to lower tariff rates. Our full year outlook shared in March reflected tariff rates under the IEEPA regime and assumed a roughly neutral net tariff impact on our profit and margins for the year, supported by substantial mitigation strategies we continue to deploy. We are updating our assumptions today to reflect Section 122 tariffs at a 10% rate on goods received after February 24 through the July 24 deadline. For the remainder of the year, we've assumed tariff rates revert back to IEEPA level rates incorporated in our original plan. We maintain this assumption based in part on comments from the administration, indicating an intention to reimpose higher tariff rates following the expiration of Section 122, potentially at levels comparable to those implemented under the IEEPA regime.

Tying these pieces together, we now expect approximately $80 million or 50 basis points of year-over-year net tariff relief to our gross and operating margin relative to our prior outlook for tariffs to be net neutral for the year. Given the timing of receipts -- this benefit is expected to be weighted towards the second and third quarters.

We are taking a balanced and prudent view in assessing how we factor this into our outlook for the company as we consider our plans in the context of three factors: Number one, the consumer; number two, the promotional environment; and number three, fuel cost pressures tied to the geopolitical environment.

From what we can see today, the consumer remains resilient. And while we continue to monitor their behavior at this time, our outlook does not assume any meaningful shift over the balance of the year. Their promotional environment thus far has remained rational. Yet we are keeping a close watch on the extent to which companies may reinvest this year's tariff upside into pricing actions.

Fuel costs are elevated, and we continue to monitor geopolitical conditions and its potential implications across the broader operating environment. Therefore, on a full year basis, we are reserving the tariff relief as added flexibility to navigate the year with approximately half of the $80 million benefit serving as a buffer against sustained elevation and fuel costs, and the remaining half reserve for potential pricing investments should the promotional environment intensify.

Should fuel costs retreat meaningfully from current levels or should the promotional environment remain rational, there would be upside to our outlook. Additionally, if the administration does not reimpose higher tariff rates upon the expiration of Section 122 or if tariffs instead return to historical baseline levels, this would be another source of upside, all else equal.

On the topic of tariff refunds, we are monitoring for potential recovery of previously paid IEEPA tariffs, where Gap is the importer of record.

Applications are currently being accepted in phases. While we are encouraged by the progress we are seeing in the industry and hopeful we will have success. At this point, recognizing we have not been part of the first phase of the review process, -- we do not have certainty in the outcome and are not factoring in any benefits of a potential refund in our outlook today.

Turning to the specifics of our outlook for fiscal 2026. Beginning with net sales. As noted in our press release, we now expect full year net sales growth of 1% to 2%. The revised outlook primarily reflects a more tempered view of Old Navy's performance based on trends observed at the start of the year. We now expect Old Navy comparable sales to be flat to up 1% for the full year. On a 2-year comp basis, our outlook reflects an acceleration in the back half as spring and summer categories become a smaller part of the revenue mix and denim and active become more important. And as some of our new growth initiatives such as beauty and sports licensing begin to roll out more purposefully. As Richard noted, while this is our current outlook, the teams are working hard to deliver better.

As it relates to the balance of the portfolio, we are adjusting the complexion of our growth expectations. With building momentum at Gap brand, we now anticipate full year comps in the high single digits. At Athleta, our outlook reflects a slower rebuild with the second quarter trending similar to the first quarter. And we continue to expect Banana Republic to post another year of comp growth, consistent with our prior outlook.

Turning to gross margin. We are maintaining our outlook for full year gross margins to be flat to up slightly to the prior year. We continue to expect merchandise margin expansion. With regards to Rod, we now expect deleverage of approximately 50 basis points on the year given our lower revenue outlook. As noted earlier, while the change in our tariff assumptions is expected to result in 50 basis points of net tariff relief, we are reserving this benefit as we account for potentially sustained fuel inflation and also embed pricing flexibility to react to potential changes in the competitive environment.

Moving on to SG&A. As we establish ourselves as a high-performing company, our standard is to continuously focus on driving improvement to our cost structure. For the full year, we continue to expect adjusted SG&A as a percentage of sales to be roughly flat year-over-year. This includes $150 million in cost savings as we enhance our efficiency and effectiveness, a portion of which will go towards managing inflation with the remaining funding our growth accelerator initiatives.

As I mentioned last quarter, there is some nuance to the quarterly cadence of the investments that will cause adjusted SG&A to continue to deleverage in the second quarter before leveraging in the second half. The improvement in the second half primarily reflects two factors that we will begin to lap. First, spending on strategic initiatives that began in the second half of last year; and second, higher incentive compensation expense that was weighted towards the third and fourth quarter last year.

Taking this all into consideration, we continue to expect an adjusted operating margin of 7.3% to 7.5% for the full year compared to 7.3% last year. At the same time, we are raising our outlook for full year adjusted EPS to $2.30 to $2.40, reflecting favorability on interest income, tax and share count. Our updated earnings outlook reflects growth in the range of 8% to 12% to last year.

Interest income is now expected to be approximately $25 million. We expect a tax rate of approximately 25%. And with the repurchase activity completed year-to-date, we anticipate a weighted average share count of approximately $375 million, down approximately 2% to last year.

Now let me turn to our outlook for the second quarter of fiscal 2026. Quarter-to-date, the portfolio is trending largely in line with Q1 performance. With the exception of Old Navy, where, as Richard noted, we experienced a slow start but are seeing improvement with the changes the teams are driving. With this in mind, we expect net sales in the second quarter to be flat to down 1% year-over-year, with comps at Old Navy projected down in the low single digits. We expect the spread between comp and net sales to be roughly similar to the first quarter, largely reflecting the same credit card dynamic we experienced in Q1, after which, we expect comp sales and net sales to track more closely for the balance of the year.

We expect second quarter gross margin to be about flat to down 50 basis points compared to last year's gross margin of 41.2%. This reflects continued merchandise margin expansion with rod deleverage of approximately 80 basis points. Our outlook for merchandise margins incorporates net tariff relief of approximately 30 basis points, combined with underlying margin expansion driven by expansion at all brands outside of Old Navy, where we expect higher promotions as we clear seasonal product.

We will also experience slight headwinds from the credit card dynamic and we expect a continued slight impact from higher fuel costs. Last, we are planning for SG&A as a percentage of net sales to deleverage approximately 110 to 120 basis points compared to last year. which reflects the timing of the growth investments I spoke to earlier.

In closing, while our outlook reflects our best view of the business today, as Richard noted, we are always striving for better. Our foundation remains strong, rooted in disciplined financial and operational rigor and a proven reinvigoration playbook. Our teams are operating with agility and a mindset of continuous improvement. Overall, this gives me confidence in our trajectory moving forward and in our ability to continue creating sustainable value, both for customers and shareholders.

With that, I'll open the line for questions. Operator?

[Operator Instructions] Your first question comes from Matthew Boss with JPMorgan.

So Richard, to dig maybe a little deeper into the top line improvement embedded in the back half of the year. At Old Navy, what is the time line that you see to fully rightsize the product assortment and value proposition if we're thinking about back-to-school? At the Gap, have you seen any sequential softening in the second quarter relative to the 10 comps in the first quarter? And then at Athleta, what's a reasonable time line for inventory optimization in your view?

Okay. Matthew, there's a lot to unpack there, but I appreciate the breadth of the questions. First, zooming out, we delivered progress across several key metrics in the first quarter. As mentioned, it's our ninth consecutive quarter of positive comparable sales. 3 out of the 4 brands are growing. Our comps up 2%, that's building on 2% comp growth from last year. Outperforming our gross margin outlook by 30 basis points and winning across all income cohorts. Last but not least, returning over $450 million in cash to shareholders through dividends and repurchases.

When we get into the specifics of each brand, we'll start with the Old Navy question. First, important to recognize we did deliver a 1% comp on top of last year's 3% growth. That also marks this brand's sixth consecutive quarter of positive comps. Now looking at the specifics of the categories, we also continue to deliver results, particularly across active denim kids and baby, these have been really categories that we've strategically pursued winning, all of them posted growth versus last year, and we continue to build relevance in those categories with our customers.

Important also to mention that we maintained share overall and continue to be a top-ranked brand in active, denim and kids and baby. Now seasonal categories have gotten off to a weaker start, in particular, dresses. And bluntly, we have not had the right fashion and value equation for that category. The team is moving quickly, obviously, to drive better conversion, sharper price points, stronger messaging. And as these changes have begun to take hold, we have seen the trends improve. But given the performance that we've had in Q1 and the continued challenge in seasonal products in Q2, we are taking a moderated view on the year.

That being said, we are driving for better results. So specifically, when I look to the second half, seasonal categories will be behind us, and I'm very confident in our ability to drive improvement. We've got some great exciting new strategic category news with back-to-school programming, our emphasis on active and denim, which are winning categories for us. We're investing in categories that we believe our customers will respond to.

As you know, we're rolling out our beauty program to the entire fleet. We just talked about our Fanatics sports licensing partnership, which is going to have exciting segments, including the NFL in the fall. And so as we look at the overall Old Navy business, first half will be challenged with the seasonal weakness. And then as we move forward in the second half, we expect that continue to improve.

Now Gap. Clearly, we feel very good about the Gap brand. Importantly, the consistency that this brand is demonstrating is evident as this is now our tenth consecutive quarter of positive comps. And it's not just a positive comp. It's a double-digit standout 10% comp against 5% last year. So this is really consistent growth. We're seeing the consistency across categories.

Women's doing incredibly well. We're making great progress in men's, and we've been improving trends in kids and baby. Category performance also remains very healthy and consistent, particularly in denim. We've been delivering clear and consistent brand messages, which is obviously resonating with our consumers, particularly with Gen Z. The collaborations that we've done continues to drive excitement and cultural relevance. At the same time, I will say we're maintaining that broad multigenerational appeal.

Now Gap will continue to power its categories with trend right assortments. We're going to leverage collaborations as we move forward. And you'll see great cultural moments to build upon as we move not only through the second quarter, but back in the back half. As mentioned again here, we're also relaunching our fragrance business which is very exciting. We're launching bags to further build on the brand's momentum.

And in summary, what I would say is Gap is back on the forefront of the cultural conversation. It is clearly on a role as an iconic American brand. We see significant runway ahead as we continue to build momentum through great product, great storytelling and of course, great execution.

The third part of your question was Athleta. So look, Athleta -- let's unpack that for a bit. 2026, as we've called out, is a rebuild year for Athleta. And as we continue to strengthen the brand's foundation under Maggie's leadership, since joining in August, Maggie has taken several actions to strengthen the brand. First off, she streamlined the assortment considerably which is resulting in better AUR and margins even with the challenging top line. She's also been repositioning talent and filling in key roles in her organization. And as you could see on our website, if you take a look, we're delivering a much better creative execution for the brand. It's early, but we are seeing some good reads of the new fashion that's arriving, albeit small. But as Katrina shared, we expect Q2 to be similar to Q1. But with all the work Maggie is doing, we feel very good about where we are and the work that they're doing to impact the second half. We've embedded a slight improvement relative to the first half trend. Let's see how the consumer responds. I will also sum up by saying Athleta remains an important brand in our portfolio, and we remain focused on rebuilding it for the long-term growth.

The next question comes from Dana Telsey with Telsey Group.

As you think about the Old Navy business, would you say the Old Navy impact was more macro or more enhancements that you need to adjust, particularly on the Women's dress business in terms of what happened? So external or internal really? And then also, it's interesting on the channel distribution, stores picked up 3% versus prior quarter flat. Online sales slowed a little bit to down 2% from the fourth quarter up 5%. Anything you would take to note either demographically, geographically about the channel performance?

Thank you, Dana. I'll take the first one and maybe Katrina join on the second one. Look, on Old Navy, we are not seeing this as a consumer issue. We actually see consistency and strength in our customer behavior. We are winning with all income cohorts growth across low, middle and high-income customers. And as we all know, when we have the right product at the right price value equation, customers are there. This is just a seasonal category that has just gotten off to a weaker start. And as I said, in particular, dresses, where we just did not have the right fashion and value equation. The team, as I mentioned, again, is working really hard and quickly with sharper price points and again, stronger messaging. And as these things sort of move through the system, the good news is as we look to the second half, the strength of our categories like active, denim, kids and baby, getting ready for back-to-school and the programs that we have to build upon them, give me great confidence in our ability to continue to improve as the year progresses.

And then, Dana, as it relates to channels, in Q1, as you said, the store sales were up 3% year-over-year. We're really excited to see that traffic was up in stores. And then online decline, it was really very specific to the quarter related to two things. First of all, Athleta is our most digitally penetrated brand. And with their weaker performance that did weigh on the overall channel. And then in addition to that, dresses really over indexes as an online business. And so with the weakness in dresses at Old Navy, that also weighed on the channel. Overall, though, that traffic was up in online as well, and we continue to believe that's a really important channel for us going forward.

Your next question comes from Brooke Roach with Goldman Sachs.

Richard, Katrina, can you provide a diagnosis of what went wrong in your consumer insight and design process that led to this dress assortment and value equation challenge at Old Navy? What are you changing to ensure more consistency in the seasons ahead?

Brooke, thank you for the question. I think in general, we know fashion is a dynamic business. And ultimately, in this particular case, in this particular category, we just didn't deliver the right fashion value equation. It doesn't necessarily mean that everything was off. It just means it was much weaker than we had anticipated. We also have had similar weak customer response in swim and short. So when we look at the total of seasonal category strength, it's just gotten off to a really slow start. That being said, we do see momentum in those other categories, as I mentioned, and even more so in some of the other categories, including knits.

We are diagnosing this very quickly in terms of where we missed. But again, as long as we see the consistency and strength in our consumer and our traffic we believe that we can convert that into momentum, particularly moving forward into the back half. This is a learn business every day. We obviously want to make sure that more things go right. And in this particular case, we just have gotten off to a weaker start. And right now, we're driving the changes that we need to. We're seeing them take hold. We've seen trends improve -- and as we move through this, I am confident that we'll have the ability to drive improvement in the back half.

Your next question comes from Adrienne Yih with Barclays.

Great. Richard, I wanted to kind of focus on a few things at Old Navy. I guess the first of them is the categories that are seasonal in nature. Last year, you had taken some pricing up in core categories, denim and athleisure, and those are not the callout segments that are kind of causing the slowdown at Old Navy. So wondering if you can talk about sort of the strength in the core. How big, if you can give us any kind of composition of how big those seasonal categories are and how much they wane into the back half?

And then secondarily, on the beauty side. What's your go-to-market strategy? And how big do you want that? Beauty can sometimes be a very complex business intensive. There's a lot of kind of mess, I'll say, sometimes in the store. So how do you approach that kind of with the in-store presentation and then kind of where do you think you want to take that in terms of categories?

Sure. So speaking specifically about the seasonal categories, it is not the largest part of our business. Although we do have top ranking presence across 9 out of the 10 categories across the industry. As you know, our focus has been strategically intended to drive active denim and kids and baby. And we have seen the growth of those very consistently in particularly the active business, which we continue to grow and pursue strength.

So while the seasonal categories in the first half represent a significant opportunity for us. When we get them wrong, if you will, they represent a challenge. That being said, seasonal as they are, as I mentioned, we get through it by the end of the second quarter and we move into a much more robust play in the categories that were demonstrating strength, particularly over the last several years. So I do feel confident that we'll be able to pursue those and ultimately continue to improve.

Now on the beauty space, we are very excited about the expansion of beauty. When we zoom out, this is one of the fastest growing, most resilient categories in the U.S. We have studied our consumer base and the relationship that they have with the beauty category. And so we know that they're expecting and excited for our brands to carry beauty products. When you look at other fashion and apparel retailers with a beauty offering, we know the category can represent anywhere from 5% of the low to 20% of their sales. So when you look at our total volume business and even just at that low, it does represent significant opportunity. But we are taking a very purposeful approach to this, both our assortment and merchandising strategy. It will be a combination in Old Navy of third-party brands as well as our own beauty offerings. We do believe that it could be a really meaningful contributor to the company over time.

We are, of course, rolling out the beauty product into our entire fleet. As you recall, last year, we piloted 150 stores. We learned a lot in that. Now we're taking that and rolling out to the balance of the fleet this year and again, as a mix of third-party and our own brands. And then at Gap, we're expanding it. We're relaunching our fragrance collection, which had really wants a very highly coveted, strong customer loyalty following, fragrances like Dream, grass, heaven, OM, we're going to reignite these with incredibly exciting marketing, refreshed packaging, updated formulation, elevated merchandising and storytelling. The presentation will be stand-alone in our stores -- we're working with experts and expertise to really execute this with a long-term vision in mind. So stay tuned. I think you'll obviously see the launch of that this fall. And Old Navy will have a full beauty assortment as we progress throughout the year.

Your next question comes from Mark Altschwager with Baird.

Katrina, I guess a few questions on the tariffs. Just first, on the cushion you've embedded here, 25 basis points for fuel 25 for competitive flexibility. How should we be thinking about that competitive piece? I guess does Old Navy need to come below a certain level? Is it more about just observing what you're seeing in the promotional environment? Second, on the assumed cliff back to the IEEPA level rates, how much of a gross margin headwind is embedded in the back half of the year or Q4 specifically? I'm just wondering what timing of inventory, if that were to happen, is that a back half story? Or is that more of a 2027 story? And then third, on the refunds, understanding that it's not in the guide, you're not contemplating it, but just anything you can share on a realistic range of outcomes there in terms of what you previously paid and how you think about the timing?

Yes, sure, Mark. Maybe I'll start with the AURs that we've been achieving in the business just to zoom out a little bit and tell you a little bit about how we're thinking about that. We've been seeing really good response to our value equation showing up in our results. So as Richard said, continued positive comps, continued market share gains, winning across all income cohorts, our AUR was up low single digits in the quarter, and it was up across all of our brands. So we think that's overall a sign that our pricing, our promotions, the way we're delivering product and value equation to our consumers is resonating. What we know also, though, is that the optimal promotional level is also very dependent on what's going on in the operating environment. And so while we are focused on getting the maximum price realization on our categories, we also know that we need to be aware that there might be a dynamic that starts to arise where we need more.

So what's embedded in our current outlook today, our AURs that are similar throughout the year to what we just achieved in Q1 and last year. And we believe that gives us a room to navigate in a normal operating environment. The tariff that we're holding aside is really there in case we need to promote more on top of that, should the environment get more promotional. As it relates to the IEEPA tariff in the second half, that was included in our original outlook. So that is not an incremental headwind to second half. In fact, we have a lot of mitigation built in, in the second half of the year. And so in the second half of the year, we had already previewed that the tariff becomes a tailwind in the back half even with that reversion because we've we're lapping last year, and we have a lot of mitigation in place.

And then maybe the last part of your question is really about the refund. We definitely have line of sight to what we are do in the refund, maybe to say a little bit more about that. We are using the reconciliation method, and that was excluded from Phase I. So we don't have a lot of news on when the reconciliation method will be included in this process. But once we know more about it and are prepared to file, we will be more forthcoming with the quantification. At this point, we just haven't really said much about it because we're not assuming that benefit in any outlook until we have more clarity on when we'll be included.

Really quick follow-up just on the model on the buyback. With the timing of the repurchases you made, just what share count should we assume for Q2 specifically? And then does the $375 million that you gave for the year, does that contemplate any additional repurchases?

Sure. I would say the weighted average share count for Q2 is probably in that like $371 million range. And then right now, what is built into the $375 million is the $400 million that we've completed year-to-date.

Your next question comes from Lorraine Hutchinson with Bank of America.

You mentioned the need for sharper pricing at Old Navy. Do you think this is the customer's reaction to some of the higher prices and lower promotions that they saw after tariffs? And is this something that you expect to wrap into the back-to-school season?

No. To be honest with you, Lorraine, I think at the end of the day, what we do see across our portfolio is that, again, when you have the right product at the right price with the right value equation, customers are there. And we're seeing consistency and strength in our customer behavior. When we look at the portfolio as a whole, again, we're winning with all income cohorts. We see the areas of strength that we've been concentrating on strategically continue to grow denim, again, active, kids and baby, knits, fleece, when, again, priced right with the right fashion quotient, we see the equation work where we're acknowledging transparently, we just got off to a weak start is in dresses. And when we talk about sharper price points, these are designed to move the merchandise with stronger messages. And to some extent, it also drives even more interest and traffic that halos all the other categories. So this is an expertise, I would say that we have, particularly in Old Navy.

Again, we're the #1 apparel specialty retailer in the country. Our pricing strategies are very precise. We know how to drive traffic and we know how to excite our consumers. In this particular case, our seasonal categories simply got off to a weaker start. That being said, Q2 is going to be an area where we move through and then look to obviously recover and drive growth in the back half. But no, I don't see any reaction at this point that we would take based on the early days of seasonal category weakness.

The last question comes from Michael Binetti with Evercore.

Just really quickly, I'm wondering if you have -- if you think there's any impact from the big tax refund season in first quarter that we should think about normalizing as we think about what the underlying rates are in the businesses?

And then, Richard, I think you said to Matt's question earlier, the trends had improved at Old Navy as the team's intervened in the seasonal categories. That was a little bit unclear on what you expect to worsen from the one comp to the -- in the first quarter to the low single-digit guidance if the strategic category sounds like they're fine. The seasonals are been intervened and are improving. Can you just help me understand the Old Navy is within the low single-digit guidance range today? And then maybe just curious a little bit more what you think might have missed the mark on the seasonals that builds your confidence that we just move past this and we have the design language right as a go forward.

Sure. Michael, first on the tax refund question, I think the tax refund provided a tailwind, I'd say, to the overall market. Within that environment, again, Old Navy held share and we gained share at the portfolio level. But we didn't really observe any meaningful change in the underlying consumer behavior or a significant step-up in spending. As I said, consumer behavior remains consistent into Q2. We're not assuming any meaningful change in that consumer behavior for the remainder of the year, but we're conscious and considerate about all the macroeconomic factors that consumers are facing.

The Old Navy category question, I would sort of zoom up and just reiterate. First off, again, fashion is a dynamic category. And our objective obviously is to always try to deliver our best assortment and customer experience. And we learn every day and we move forward. As we zoom out, even with the slower start for Old Navy and our lower sales assumptions, our portfolio is still on track to deliver our third year in a row of profitable sales growth. We look at the portfolio as a whole and granted, we're experiencing some challenges in our seasonal categories, but we're also seeing the strength in others. And so that balance in the mix is ultimately where we've taken a moderated perspective in terms of where we are and where we will net out for the second quarter. And then ultimately, where we see continued improvement in the back half.

And so on balance, again, giving ourselves some room obviously, to perform in the context of what we want to lay out as expectations, but we're always working to outperform. And certainly, the teams here are striving constantly to do that, and you could expect that as we move forward. This on the seasonal marks on aspects, we can get into the broad-based narrative around fashion, the specifics around the bohemian style versus others. Did we have enough feature and function in some of our dress assortment that we're now learning our customers would have wanted, I think those are all learnings that the teams are taking back right now. And ultimately, we'll have that guided for the next year as we move into the next year pretty quickly here.

But as I look again at our assortment and category depth, the areas that we're going to create demand creation in the back half, seasonal categories moving through the second quarter, I do feel confident that as we get into the back half here, we're going to see continued improvement.

This concludes the question-and-answer session and will conclude today's conference call. Thank you for joining. You may now disconnect.

Good afternoon, ladies and gentlemen. I would like to welcome everyone to the Gap Inc. Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to introduce your host Whitney Notaro, Head of Investor Relations.

Good afternoon, everyone. Welcome to Gap Inc.'s Fourth Quarter Fiscal 2025 Earnings Conference Call. Before we begin, I'd like to remind you that the information made available on this conference call contains forward-looking statements that are subject to risks that could cause our actual results to be materially different. For information on factors that could cause our actual results to differ materially from any forward-looking statements, please refer to the cautionary statements contained in our latest earnings release, the risk factors described in the company's annual report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2025, quarterly reports on Form 10-Q filed with the Securities and Exchange Commission on May 30, 2025, August 29, 2025 and November 26, 2025, and other filings with the Securities and Exchange Commission, all of which are available on gapinc.com.

These forward-looking statements are based on information as of today, March 5, 2026, and we assume no obligation to publicly update or revise our forward-looking statements. Our latest earnings release and the accompanying materials available on gapinc.com also include descriptions and where available, reconciliations of financial measures not consistent with generally accepted accounting principles.

All market share data referenced today will be from Sircona's U.S. apparel Consumer Service for the 12 months ending January 2026, unless otherwise stated. Joining me on the call today are Chief Executive Officer, Richard Dixon; and Chief Financial Officer, Katrina O'Connell.

With that, I'll turn the call over to Richard.

Thanks, Whitney, and good afternoon, everyone. I am pleased to report that we delivered another successful fourth quarter, in line with our expectations and marking another year of meaningful progress for Gap Inc. In the quarter, we achieved comparable sales of 3%, our eighth consecutive quarter of positive comps, while once again winning across all income cohorts. We continue to do what we said we were going to do, underscoring the growing resilience, durability and potential of our portfolio.

Reflecting on the full year, 2025 continued to demonstrate our ability to perform while we transform, even in a highly dynamic environment as we execute our strategic priorities and deliver consistent performance while fixing the fundamentals. Through the disciplined execution of our brand reinvigoration playbook, we are building a clear track record of reliable growth, proving our 3 largest brands can deliver quarter after quarter. Gap, Inc achieved its second consecutive year of top line growth. Full year net sales grew 2% at the high end of our outlook, fueled by comparable sales of 3%, building on last year's 1% net sales growth and 3% comp.

Our playbook continues to fuel our portfolio with Gap brand delivering its third consecutive year of positive comp sales and both Old Navy and Banana Republic reporting their second consecutive year of positive comp sales. We delivered one of our highest gross margins in the last 25 years and generated $1.1 billion in full year operating income, a clear reflection of the strength of our platform and the financial and operational rigor embedded across the organization.

Disciplined execution throughout the year further strengthened our balance sheet, enabling us to end 2025 with a cash balance of $3 billion, our highest in nearly 2 decades. Based on our strong financial position and confidence in our continued progress, the board recently approved an increase in our first quarter dividend and a new $1 billion share repurchase authorization.

I am proud of the resilience this team has shown and what we have achieved together. This performance gives me confidence as we continue to move forward. That confidence is rooted in something deeper than any single quarter or year. Since 1969, when the Fishers opened a single store to bridge a generation gap, Gap Inc. has proven that purpose and profit can coexist, taking pride in doing what's right for our company, our customers and our communities and building brands that matter.

It's that legacy of bridging gaps and leading with purpose that brings us to today. We have a unique opportunity with the legal settlement received to pledge a $50 million charitable donation to a combination of the Gap Foundation and our donor advised on. This marks a true legacy moment. honoring a heritage rooted in shared humanity and ensuring that our commitment to create a better world endures for generations to come.

On today's call, I'll discuss our fourth quarter performance by brand, and share how we're thinking about 2026 in the context of our strategy. Then Katrina will walk you through our detailed financial results and outlook, after which we will open the call for questions. Starting with Old Navy. As we execute on our reinvigoration playbook, Old Navy is becoming a proven growth engine with consistency and scale that drives meaningful value. Fourth quarter comp sales grew 3%, building on last year's 3% comp growth and reflecting the brand's fifth consecutive quarter of positive comps. Old Navy ranks as a top 3 brand in 9 of the 10 largest apparel categories and gained share in all 5 of the largest categories on a rolling 12 basis.

Old Navy continues to win at the intersection of great product, quality and price. The brand's focused pursuit of leadership in active, denim and kids and baby drove strong performance across each of these categories as the brand continued to innovate and excite our customers. Both active and denim continued to grow share and the strong execution of our Disney partnership has positioned Old Navy as Disney's #1 apparel brand direct-to-consumer partner in the United States. The brand has also continued to evolve its media mix model to meet consumers where they are, growing its presence on social media platforms and significantly increasing creator volume with over 15,000 creators in the fourth quarter, almost 3x the number of creators last year.

Looking ahead, we believe Old Navy is well positioned, and we're confident in the brand's ability to deliver consistently, largely in line with its performance over the past 2 years. Now let's turn to Gap. Gap's momentum accelerated meaningfully in the fourth quarter, delivering comp sales up 7% on top of last year's 7% comp growth, marking its ninth consecutive quarter of positive comps.

Returning to its powerful heritage. The brand is once again bridging the generation gap continuing to attract Gen Z while growing its core customer and that multigenerational appeal is showing up in the results. Gap at its best is a true original a pop culture brand that celebrates individuality, united through music genres and collaborations that bridge generations and cultures. We're leaning into that heritage with intention from red carpet moments, most recently addressing Leon Thomas for the Grammys and Claire Danes for the Golden Globes to cohosting a star-studded Super Bowl event in San Francisco to spotlighting emerging artists from Tyler and Kroy Sevan to Katie and Sienna Spiro.

Gap is showing up in culture in ways that are authentic and relevant. In the fourth quarter, the team executed our playbook with Fluence, which was demonstrated through their Give Your Gift holiday campaign and culturally relevant collaborations supported by a highly evolved media mix. We saw particular strength in key categories like fleece, including logo, denim and sleepwear. As brand relevance has increased, we're also proving elasticity. This was our second quarter of meaningfully pulling back discounting driven by on-trend product and strong brand heat.

With a focus on elevating the customer shopping experience, new store models continue to outperform the fleet, giving us confidence in the opportunity to accelerate these formats in 2026. I'm proud to say that Gap, our namesake brand of 56 years is firmly back in growth mode. Banana Republic delivered a 4% comp, building on a 4% comp last year with sharper merchandising and execution. Banana Republic has returned to its roots as a storytelling brand, expressed through the lens of the modern Explorer. You can see that story coming to life more cohesively and comprehensively through our assortments, merchandising and how we show up in culture and consumers have taken notice. There's greater synergy between men's and women's with head-to-toe wardrobing guided by a clear style guide and design language that's informing design, presentation and storytelling, leather, Swede, Cashmere and texture, all synonymous with Banana Republic's design language are reinforcing the brand's distinctive point of view.

This is a great example of the differentiation of our portfolio coming alive, and we look forward to getting even sharper with more precision, more narrative led merchandising and a dialed up fashion quotient that underscores Banana Republic's unique brand DNA. Shifting to Athleta. While Athleta remains a work in progress, we took decisive action in the second half of 2025, appointing Maggie Gauger to lead its reinvigoration. The active category remains strategically important and resilient, even amid disruption customers continue to make fashion choices that are active oriented.

Within that landscape, Athleta holds a meaningful position as the #5 women's active brand with distinction as a women's only brand rooted in quality, performance and design intent exclusively for her. And while Athleta sales trend has been disappointing, we've accumulated critical learnings and are acting on them with intention. We are rearchitecting the assortment, building key items into enduring franchises and reorganizing the brand around consumer insights. Maggie is going deep with the team, even meeting with Athleta's founder to reconnect the brand to its original purpose and establish clarity and alignment around the brand's identity.

With the strength of our portfolio and our proven playbook, 2026 will be about positioning the brand for sustainable growth in the years ahead. Progress will take time. but I am confident we are attracting the right talent to rebuild Athleta. In 2025, the power of our portfolio became clear as our playbook successfully delivered consistent growth across our 3 largest brands. This was reflected in the metrics that matter the strength of our product and in the cultural narratives that are resonating with consumers.

Moving at the speed of culture takes focus and discipline and we're working together with clarity and conviction to continue to advance our strategy. As we've shared, we've been very purposeful in the sequential order of our transformation. Over the last 2 years, we have focused on fixing the fundamentals, maintaining financial and operational rigor, reinvigorating our brands, strengthening our platform and energizing our culture. The meaningful progress we've made across these strategic priorities has enabled us to consistently perform while we transform, strengthening our financial model and driving shareholder value.

As we move into the next phase of our transformation, building momentum, our primary focus will be growing our core apparel business through continuous improvement, driven by disciplined execution with better product, marketing and storytelling. In parallel, we will be building on the strength of our apparel business by thoughtfully seeding growth accelerators and new capabilities. We are beginning with expansions into adjacent lifestyle categories such as beauty and accessories, two categories that are underdeveloped in our portfolio but are meaningful to our consumers and sizable in the industry. We will also continue advancing our fashion tainment platform and technology capabilities all with the intent to build scale, relevance and revenue over time.

Let me take a moment to share more about each of these, starting with beauty. As discussed in the past, beauty is one of the fastest-growing, most resilient retail categories in the U.S., and our customer insights reinforce strong engagement. Our research suggests that for other fashion apparel businesses that have entered the beauty space, beauty makes up anywhere from 5% to 20% of their business. We believe this is a good indicator of the category's potential in our business over the longer term.

In 2025, we introduced the consumer to our expanded beauty assortment at Old Navy and are making refinements based on our customer feedback. In 2026, we'll be deepening this engagement with consumers and look forward to reintroducing a fragrance assortment at Gap this summer.

Turning to accessories. Our accessory category performed well in 2025, reinforcing our confidence in this expansion. According to Euromonitor, this category has a $15 billion total addressable market. And today, Gap, Inc. represents just 1% of the market share. Consumers are looking for us to be more pronounced in accessories, and we see an exciting opportunity to become a destination for wardrobing. We look forward to launching an expanded accessory line for holiday. We believe the beauty and accessory categories have the added benefit of serving as margin and traffic drivers that strengthen our brands, deepen customer connection and build lasting loyalty. We have appointed proven industry experts to lead each of these areas with focus and discipline.

Our fashion payment platform is another area we will be focusing on in 2026. Today's customers aren't just buying apparel. They're buying brands that tell stories and drive cultural conversations as we continue to build our brands, we see entertainment as a powerful growth lever. Last month, Pam Kaufman joined Gap Inc. as Chief Entertainment Officer, adding focused leadership, expertise and relationships across entertainment and licensing. The fashion payment platform we're building is about amplifying and scaling what is already working, expanding licensing, strengthening strategic partnerships and aligning our assortments more intentionally with the entertainment calendar.

One capability we believe can be better monetized is our loyalty program. Gap Inc. has one of the largest programs in U.S. apparel retail, with nearly 40 million active members. Last week, we launched Encore, our newly reimagined loyalty program, setting a new standard for loyalty in the apparel space. Encore brings our fashion payment platform to life by turning purchases into experiences that give members access to fashion, entertainment and the moments they care about across our portfolio of brands. It represents a shift from a traditional points-based loyalty program to a broader engagement platform. By bringing fashion, entertainment and access together, we are building momentum, deepening relationships and creating long-term value across our portfolio.

Technology is another platform capability where we see opportunity, especially with AI. Our AI strategy is focused on 3 areas: enable, optimize and reinvent. Enable is about enterprise-wide adoption equipping our teams with AI tools that improve day-to-day productivity, streamline workflows and build AI fluency across the organization. Optimized focuses on high-impact process improvements to drive efficiency, accuracy and speed. Reinvent is about reimagining our customer, product and enterprise journeys end-to-end. We are focusing on areas where AI can meaningfully reduce customer friction, increase predictability across product to market and unlock productivity within the enterprise.

As we close the first chapter of our transformation and step into the next, we do so with a brand portfolio that is consistently growing, healthy gross margins, disciplined expense management sustained bottom line performance and strong cash on hand. Looking ahead, we have a focused, energized team that believes in the future we're building. Our aspirations remain high, and we're positioned to deliver I'm excited about the opportunity ahead and confident in our ability to capture it.

I'll now turn the call to Katrina for a closer look at our financials.

Thank you, Richard, and thanks, everyone, for joining us this afternoon. Execution of our strategic priorities continues to drive results, and 2025 was a strong year of financial performance. We grew net sales 2% gaining market share for the year as we demonstrated relevance to customers of all income levels. It's exciting to see our playbook driving the second consecutive year of top line growth fueled by positive comp sales across our largest brands, Old Navy, Gap and Banana Republic.

The rigor we've developed is delivering reliable profit performance with another historically high gross margin of 40.8%, and operating profit of $1.1 billion and an operating margin of 7.3%. These results reflect improved AURs as we capitalize on the growing strength of our brands, combined with SG&A leverage as we continue to optimize our cost structure. Tariff impacts were significant.

However, our mitigation strategies have effectively managed these pressures. Our focus on cost optimization and inventory management drove robust cash generation, ending the year with $3 billion in cash, cash equivalents and short-term investments. In 2025, we generated $1.3 billion in net operating cash and $823 million in free cash flow. Our strong balance sheet allowed us to invest in high-returning projects while returning over $400 million to our shareholders through dividends and share repurchases. I'm incredibly proud of what this team has accomplished and our performance gives us confidence in the 2026 outlook we provided today, which reflects another year of sales growth in addition to operating margin expansion.

Before discussing the detailed results for the quarter and the year, it's important to note that changes in global tariff rates in 2025 had a substantial impact on our profits. Specifically, tariffs influenced our fiscal year's gross and operating margins by approximately 120 basis points and affected our fourth quarter gross and operating margins by approximately 200 basis points. Despite these pressures, our reported results today include these factors, showcasing our strong underlying performance, thanks to the effective execution of our strategic priorities.

Now let's turn to our fourth quarter results. I'm pleased with our performance, which included a solid holiday season, underscoring the increasing resonance of our brands with consumers. Fourth quarter net sales of $4.2 billion increased 2% year-over-year with comparable sales up 3%, marking our eighth consecutive quarter of positive comps. Results were in line with our plans despite disruption from expansive store closures due to extreme weather at the end of January.

By brand, Old Navy net sales were $2.3 billion, up 3% versus last year, with comparable sales up 3%, building on last year's 3% comp growth. The brand's price value equation is resonating with consumers as Old Navy continues to win with strategic categories and across a wide range of income levels.

Turning to Gap brand. Net sales of $1.1 billion were up an impressive 8% versus last year, and comparable sales were up 7%. This was on top of last year's 7% comp growth demonstrating Gap's momentum as it continues to expand its customer base across generations. Banana Republic net sales of $549 million were up 1% and year-over-year with comparable sales up 4%. The brand delivered its third consecutive quarter of comp growth, reflecting progress in product elevation and sharper marketing and merchandising.

Athleta net sales of $354 million decreased 11% versus last year and comparable sales were down 10%. We remain focused on rebuilding the brand for the long term. Let's continue to the balance of the P&L. Gross margin of 38.1% declined 80 basis points. Lower discounting resulted in another quarter of AUR growth. driven by the consumers' response to our relevant product and storytelling. Compared to last year, merchandise margins were down 90 basis points due to the net impact of tariffs. ROD leveraged 10 basis points in the quarter. SG&A increased to $1.4 billion, primarily due to the quarterly timing of incentive compensation in addition to strategic investments. SG&A as a percentage of net sales was 32.7%, deleveraging 10 basis points versus last year.

Fourth quarter operating margin of 5.4% was down 80 basis points compared to last year, primarily due to the approximately 200 basis point headwind from tariffs. Earnings per share in the quarter were $0.45 versus last year's earnings per share of $0.54.

Now let's turn to our full year 2025 results. Net sales of $15.4 billion increased 2% year-over-year at the high end of the guidance range we provided with comparable sales up 3%. Our playbook is working and drove strong results across our 3 largest brands, with Old Navy comp sales up 3%, Gap up 6% and Banana Republic, up 3%. Comp sales for Athleta were down 9%. Gross margin of 40.8% declined 50 basis points versus last year. Merchandise margin was down 80 basis points due to the impact of tariffs and ROD leveraged 30 basis points. SG&A was $5.2 billion. As a percentage of net sales, SG&A was 33.5%, leveraging 40 basis points versus last year. We achieved our targeted cost efficiencies in 2025 as we rigorously managed our core expenses to fund inflation and begin our investments in growth accelerators.

Fiscal 2025 operating income was $1.1 billion, resulting in an operating margin of 7.3%. The 10 basis point decline in operating margin versus last year was due to the estimated 120 basis point impact of tariffs, implying roughly 110 basis points of underlying margin expansion versus last year's 7.4%. Earnings per share for the year were $2.13, down 3% versus last year's EPS of $2.20.

Now turning to the balance sheet and cash flow. End of quarter inventory levels were up 7% year-over-year, primarily attributable to increases in tariff-related costs. Our disciplined inventory management resulted in units down year-over-year, and we believe we ended the year with the right inventory composition going into fiscal 2026. We expect our inventory buys in the year ahead to be in line with our principle of unit purchases positioned modestly below sales.

As I highlighted earlier, we ended the year with cash, cash equivalents and short-term investments of $3 billion, an increase of over $400 million compared to last year. Full year net cash from operating activities was $1.3 billion, and we generated free cash flow of $823 million for the year. Capital expenditures were $470 million. With regard to returning cash to shareholders during the year, we paid $247 million to shareholders in the form of dividends.

Additionally, we repurchased 7 million shares for $155 million, achieving our 2025 goal of offsetting dilution. Before I move on, I want to thank our teams for their hard work and diligence this past year. Our 2025 results reflect significant progress in our transformation journey with the execution of our strategic priorities, driving 2 years of impressive results. We are moving forward from a position of strength, and we'll continue to operate with the same rigor in 2026.

Looking ahead, we are energized by our strong business results, which underpin a confident outlook for 2026. Our strong performance at Old Navy, Gap and Banana Republic is expected to drive another year of net sales growth. At the same time, we are committed to rebuilding Athleta for sustainable long-term success. With our brands becoming increasingly relevant to consumers and our stringent inventory management practices, we anticipate continuous improvement in average unit retails, supporting robust gross margins aligned with historically high levels. Successfully navigating the challenges of a second year of tariff dynamics we are poised to not only maintain but improve our financial health.

Our strategy for 2026 includes generating further cost savings by increasing efficiencies in our core operations. enabling us to combat inflationary pressures while reallocating resources into strategic growth investments. This approach is designed to deliver a third consecutive year of profitable sales growth and robust cash flow generation, enabling us to continue capital investments and enhance shareholder returns. I want to note that our guidance today reflects tariff rates under the IEFA regime and therefore, does not contemplate the recently announced Supreme Court ruling and subsequent Section 122 announcement.

These recent events were not contemplated in our original plans for fiscal year 2026. If the Section 122 tariffs stay in place for the year or expire in July, we do believe there could be an incremental benefit to our current plans. With many scenarios still being debated, we are awaiting more clarity before changing our plans. At this time, we expect any benefit to Q1 to be minimal based on the timing of receipts. In the meantime, our teams are continuing to leverage the extensive tariff mitigation strategies we've built out over the past year, which sets us up for the annualization of last year's tariffs to be net neutral to 2026 full year operating income as previously disclosed.

As noted in today's earnings press release, our outlook excludes the net estimated gain related to a legal settlement in the first quarter as well as the pledge charitable donation of approximately $50 million to a combination of the Gap Foundation and our donor-advised fund, which we are pleased to make as we look to advance our purpose. Both are included in our reported EPS guidance for fiscal year 2026.

As I take you through the details of our 2026 outlook, I'll spend some time unpacking the factors that shape the year as there is some nuance to the quarterly cadence related to the timing of tariffs and investments. Let's jump into the full year. Starting with revenue, we expect net sales growth of approximately 2% to 3% year-over-year. While there are a range of outcomes for each of our brands, we expect continued comp sales growth across our 3 largest brands and negative mid- to high single-digit sales declines for Athleta in the first half of the year, and the team is hard at work on the second half.

Turning to gross margin. We are proud of the underlying gross margin performance achieved in 2025 and expect gross margins to be flat to up slightly year-over-year in 2026 compared to 40.8% last year. This includes a balanced plan of realizing higher AURs through better sell-throughs and lower discounting as well as implementing adjusted sourcing strategies as we offset the tariff impact that annualizes in the base this year. Regarding tariffs specifically, the net tariff impact is expected to be neutral on the full year.

Our sourcing strategies build sequentially through the year, resulting in an approximately 150 basis point headwind to the first half gross margin that turns to an approximately 150 basis point tailwind in the second half of the year. Specific to the first half, we expect a 200 basis point headwind to Q1, which improves to approximately a 100 basis point headwind in Q2. Separately, as we conclude our multiyear program of rationalizing our store footprint and begin to reaccelerate our capital expenditures, we expect Rod as a percentage to sales to deleverage slightly.

Moving on to SG&A. We expect adjusted SG&A as a percentage of sales to be roughly flat year-over-year. Our focus is on further improving our cost structure aiming to achieve around $150 million in incremental savings by enhancing efficiency and effectiveness in 2026. These savings will help us manage inflation and reinvest in more valuable initiatives such as expanding into new categories and capabilities like beauty, accessories, fashion retainment and technology, as Richard mentioned.

We initiated our growth accelerator investments in 2025, particularly in the latter half of the year. These will continue into 2026 initially causing some SG&A deleverage in the first half. However, we anticipate SG&A to leverage in the second half as we lap the higher spend in the back half of last year. Taking this all into consideration, we expect an adjusted operating margin of about 7.3% to 7.5% for the full year.

Interest income is expected to be approximately $10 million to $15 million, and we expect a tax rate of approximately 27%. Reported EPS is expected to be $2.71 to $2.86, which includes an estimated $0.51 benefit related to a legal settlement in the first quarter net of the $50 million charitable donation. We expect an adjusted EPS of $2.20 to $2.35 representing growth of 4% to 10% year-over-year.

Our healthy balance sheet supports our balanced capital allocation framework with the primary goal of enhancing long-term shareholder value. The framework remains as follows: our first priority is investing in the business through high returning capital investments. In 2026, we expect to invest approximately $650 million which relates primarily to our investments in stores, technology and supply chain.

Second, we believe in paying an attractive dividend that grows with net income growth. In alignment with that principle, we recently announced that the Board raised the first quarter dividend by approximately 6% to $0.175 per share. And our third priority is focused on share repurchases. Previously, we aimed to simply offset dilution. We are now committed to executing a repurchase program with a goal of driving slight accretion. And -- on that note, the Board has approved a new $1 billion share repurchase authorization that we expect to utilize to meet this goal.

Now let me turn to our outlook for first quarter of fiscal 2026. The quarter is off to a good start, and our outlook contemplates our quarter-to-date performance. We expect net sales in Q1 to be up 1% to 2% year over year. This includes an approximately 150 basis point spread where comp outpaces net sales, largely related to lapping last year's benefit from our credit card agreement, which continues into Q2, but does not impact the back half of the year. We expect first quarter gross margin to be down about 150 to 200 basis points compared to last year's gross margin of 41.8% and including an estimated 200 basis points of net tariff impact. This implies an underlying gross margin of flat to up 50 basis points. And we are planning for adjusted SG&A as a percentage of net sales to be about 35%, which reflects the timing of the growth investments I spoke to earlier.

Reflecting on 2025, I'm proud of our accomplishments. Our consistent execution over the past 2 years has laid a solid foundation, driving our confidence as we advance in our transformative journey. As we transition into 2026, we're excited to amplify our core strengths while fostering new opportunities through strategic growth accelerators and innovative capabilities. Our balance sheet is giving us the ability to invest purposefully in our business and accelerate cash returns to shareholders. With demonstrated progress and an exciting road map ahead, we are building a high-performing company that stays focused on delivering sustainable, profitable growth and long-term value for our shareholders.

With that, we'll open the line for questions. Operator?

[Operator Instructions] Your first question comes from the line of Mark Altschwager with Baird.

Richard, you outlined several growth accelerators with beauty, accessories, fashion retainment, technology. Can you talk about how you're balancing investments to maintain momentum in the core while also seeing growth in these new areas and how much can these accelerators move the needle in 2026 from a revenue perspective?

Thank you for that question. Thanks for the question, Mark. First off, it's important to note, we delivered a successful fourth quarter, marking another year of meaningful progress for the company. We achieved our second consecutive year of top line growth and that's the eighth consecutive quarter of positive comparable sales.

Now these are really important to acknowledge as we sort of zoom out and look at our transformation road map, which has 3 phases. The first phase was fixing the fundamentals. We're now moving into building momentum, and the third phase is accelerating growth. So over the past 2 years, during our fixing the fundamentals phase, the meaningful progress that we've made across our strategic priorities has really enabled us to consistently perform while we've been transforming, strengthening our financial model and essentially driving shareholder value. It's this performance that's giving me the confidence as we continue to move forward, and that means moving forward into the next phase of our transformation that we call building momentum.

Now in this next phase, our primary focus is going to be growing our core apparel business. We've got to do it through continuous improvement. That means driven by disciplined execution, better product better marketing, better storytelling, better in-store execution. Now in parallel to that, we're going to be thoughtfully seeding our growth accelerators, which you mentioned and by the way, new capabilities. The first, which we've talked about is expanding our presence in lifestyle categories such as beauty and accessories.

Now these are 2 underdeveloped categories in our portfolio that are meaningful to our consumers. But are also sizable in the industry. Second, we're rebuilding our fashion payment platform, and we're advancing our technology capabilities. Now when you combine the context of continuous improvement of our core business, delivering low to mid-single-digit growth with the accelerators which begin to scale in 2027 and beyond, it really creates an exciting growth proposition. We are obviously very excited about where we are right now, and we'll look to provide updates on how this will evolve not only from our business perspective, but the economic model in the long term. But overall, the aspirations remain very high, and I'm looking forward to all we can accomplish and maybe Katrina has more to say on the balance of the question.

Yes. I mean, Mark, I'm happy to talk about how we're thinking about the investments. This is really an exciting time for the company as we're balancing the rigor that we put into the business that's driving real value with the growth opportunities that are really important to the long-term success of the company. So our guidance today reflect what we think is a very balanced approach where we're continuously improving the cost structure of the company.

As I said, we're aiming to drive an incremental $150 million in savings. And then we're looking to really repurpose those into making investments in these seed categories that Richard just talked about like beauty, fashion retainment, accessories and technology. And as a result, we think our outlook that we presented today has SG&A as a rate of sales flat year-over-year. I would say this is what it means to be a high-performing company that strives for continuous improvement. And maybe the last thing I'll add, Richard said, this is really early days. We're seating. We're doing a lot of work to get teams in place and begin to get these in front of customers. But I think the bigger portion of these will start to deliver in '27 and beyond.

A quick follow-up for Kartina on gross margin. Just with respect to the Q1 guide, you don't seem to be incorporating much in terms of offsets to the 200 basis point tariff headwinds, whereas you have been able to offset much of that headwind through the back half of 2025. So I was hoping you could just walk us through some of the other gross margin puts and takes there.

Sure. Sure. Yes. Thanks, Mark. So for gross margin, as you say, in Q4, margin decreased 80 basis points year-over-year, and that was inclusive of a 200 basis point tariff impact which implies that the underlying gross margin was much stronger. That was driven by AUR growth and our customer really responding to our product and our storytelling, which led to lower discounting and ultimately contributed to very strong underlying gross margin expansion.

In addition to that, we saw ROD leverage in the quarter of about 10 basis points as a result of higher sales. As we move into Q1, I would say there's 2 things. We gave a guide of margin down 150 to 200 basis points. The outlook does include the net tariff impact of about 200 basis points, so very similar to Q4. I think you heard me say on the call, and we previewed this last time, our sourcing strategies are going to build sequentially throughout the year.

So the 200 basis point impact in Q1 becomes about 100 in Q2 and actually flips to a tailwind, all net neutral on the full year. So there's a little bit of a cadencing of the tariff. And then maybe the 2 other things I'll call attention to in Q1 are that promotions right now are assumed to be relatively flat year-over-year, whereas we did see improvement in Q4. So we'll see, we're taking a balanced approach. And then maybe lastly, we saw leverage on ROD in Q4, and I think you heard in my prepared remarks, we'll see slight deleverage in Q1 on ROD.

Your next question comes from the line of Matthew Boss with JPMorgan.

So Richard, on the inflection of the Gap brand to growth mode that you cited, what do you see as the next leg or opportunity to accelerate market share in the next strategic phase and then, Katrina, just to confirm, your 1% to 2% revenue growth forecast for the first quarter. So that embeds a 150 basis point headwind from the credit card adjustment.

So underlying revenue growth would be 2.5% to 3.5% is actually an acceleration from 2.1% in the fourth quarter. Can you just break down the areas of underlying sequential acceleration that you're seeing in embedding? And maybe elaborate on the strong start to the quarter at the Gap and Old Navy.

Okay. Matthew, thanks for the question. I'll take the first part, and then Katrina will take the second. First off, thank you for calling out the Gap brand. It has been really exciting to see Gap, of course, our namesake brand, building on the success quarter after quarter. So to your point, we've already begun to comp the comp. I mean achieving an impressive 7% comp on top of last year's 7%. The fourth quarter also marked the brand's ninth consecutive quarter of positive comps.

So when you look at the last 2 years, Gap has consistently gained market share. Now it's through compelling product assortments, better marketing and in-store execution and it's results like this that also increase our multigenerational appeal. We've seen growth across all income cohorts with more high-income customers choosing Gap. We've had strength in key categories like fleece, including logo, denim has been outstanding. And of course, sleepwear drove the performance in the fourth quarter. And as brand relevance has increased, we've also meaningfully pulled back on discounting. I also want to add, it was really exciting to see the brand gain share in denim in 2025. We've increased our ranking to -- now that's up from #10 just 2 years ago. And overall, the brand's momentum is giving us the confidence to also accelerate the rollout of our new store formats in the years ahead which will also continue to just excite consumers.

So all in all, Gap is firmly back in the cultural conversation as a true pop culture brand. Its product resonance is showing up on the red carpets to surprising collaborations, and I can guarantee you there's a lot more exciting moments to come in 2026.

And then, Matt, as it relates to Q1 revenue, so yes, the guide was 1% to 2% revenue growth. And then as you say, we have about 150 basis point headwind that makes comps outpaced total revenue -- and so the implied comp guide is 2.5% to 3.5% for the quarter. The way I think about it is the midpoint of that at is roughly in line with the 3% we just delivered in Q4.

So largely a continuation of the trends in the business. As it relates to Q1 quarter-to-date, as I shared, the quarter-to-date comp is off to a good start, and that's built into the outlook that we provided today. This time of year, there's always weather dynamics at play in all of this stuff. But we're largely trending in line with the guidance we just gave. And then as I think about the brands in the quarter, I guess, to be helpful, I would say this, Old Navy, as Richard said, is proving to be a reliable growth brand and 2 years of delivering positive 3 comps. So we'll see where the quarters land, but I see them as a very consistent driver of value. Gap is firmly in growth mode. Banana has 3 quarters of comp, and we're really excited to see BR deliver and then, as I said in my remarks, Athleta, we are expecting negative mid- to high single-digit sales declines in the first half of the year, and the team is really working on the second half.

Your next question comes from the line of Simeon Siegel with Guggenheim.

Richard, any color you can share on store sales by brand, how you're thinking about that going forward? I guess, basically, I'm curious if you think the culturally powerful campaigns you guys are running should bring more people into the stores next year. And I guess whether that's even something you're targeting or whether you're channel-agnostic. And then I'd be curious to hear the beauty sounds really exciting. Curious to hear the learnings and the refinements that you were mentioning about Old Navy Beauty given that comment and whether you think this becomes a visitation driver or more of a UPT add-on?

Sure. Simeon, thanks for the question. Let me start by saying fashion is entertainment. And today's customers are not just buying apparel, although, of course, our product has to meet and exceed their expectations, but they're buying into brands that tell compelling stories and drive cultural conversation. And as we continue to build our brands, we see this intersection of fashion and entertainment, our fashion payment platform as a powerful growth lever. The creative assets that you've been seeing and that we've been developing across our brands have evolved to specifically drive relevance and increase engagement. We've been leveraging music, art, dance, film, -- these are all forms of entertainment.

And whether it's a music video with Katie or a fashion show during the NBA All-Star weekend, these are great examples of fashion tainment. We're serious about it. We appointed Pam Kaufman as our Chief Entertainment Officer, to lead our fashion payment platform as we take it to the next level. We're going to be adding incredible expertise, essentially extending our iconic IP into more experiences and product opportunities that drive relevance and revenue. these campaigns, as you call out, they're designed to drive interest. And the more interesting we become, the more exciting it becomes for consumers and the more traffic we drive each year to our omnichannel experiences. As we look at some of the ways that we think about stores, this is a really important way for consumers to experience our brands. They bring product and storytelling and service to life in ways that digital can't. And I would say we're now at a very pivotal point.

The fleet is well positioned. We've been testing new formats and experiences Gap Flatiron, Chestnut Street here in San Francisco, Banana Republic Soho, giving Gap's brand momentum, we have the confidence to start to accelerate the rollout of our new store formats in the year ahead, which we believe will also really excite consumers. You asked about beauty. So this is also a really exciting extension Beauty is one of the fastest-growing, most resilient retail categories in the U.S., and our consumer insights reinforce strong demand across other fashion apparel retailers with a beauty offering -- the category represents anywhere between 5% to 20% of their sales, highlighting the meaningful potential that this category can represent within our core business over time. It's also important to recognize we have been in this category. We just have an underdeveloped beauty business. And based on the insights that we've learned, we have a lot of potential in this category.

So in 2025, we announced our plans for a strategic expansion into the category with a phased approach, starting with Old Navy in the fourth quarter, and Gap will be relaunching its fragrance later this year. The Beauty collection was piloted in 150 stores in the fourth quarter. We had some select offering in dedicated shop-in-shops. The pilot validated strong consumer interest confirmed that beauty really enhances the engagement, it's basket building and it's exciting our customers. And you'll hear a lot more about it as we move forward.

Your next question comes from the line of Brooke Roach with Goldman Sachs.

Richard Katrina, can you speak to the AUR versus unit growth trends that you're seeing in the Old Navy banner in fourth quarter and your expectations for net pricing growth at Old Navy for 2026. Additionally, Richard, I would be very curious to see if there's any apparel category initiatives that you have in place at that brand that could shift the Old Navy brand further into growth mode in 2026?

Brook, maybe I'll start off. I won't speak probably specifically to Old Navy, but I'll certainly talk at the corporate level. For both fourth quarter and fiscal year 2025, we saw average unit retail growth which reflected the consumers continuing to respond to our product and our value and our storytelling.

In addition to that, both for fourth quarter and the full year, units were flat to up slightly, and we also saw traffic positive. So exciting to see winning on all of those metrics. Maybe as I talk a little bit more broadly about pricing, we approach pricing as we always do. we consider all the various inputs while maintaining most importantly, the overall value proposition for our consumers. I think we know that we're doing this well as we evaluate the consumers' response to our value equation, which is showing up in 8 consecutive quarters of positive comp sales, continuing to gain share and winning across all income cohorts.

So our ability to grow AUR in Q4 and for the full year really gives us confidence that our strategies are working. As I look into 2026, the AUR growth that's embedded in our 2026 plan is roughly in line with how we've been delivering in 2025. So it reflects a balanced plan of realizing higher AURs through better sell-throughs and lower discounting.

And Brook, I'll talk a little bit about the question related to the categories and potential growth accelerators. But first, I just want to reiterate, we delivered another strong quarter for Old Navy and importantly, this has been consistent share gains over the last 2 years. It's a great reflection of the brand's strength and reliability and we continue to win at the intersection of great product, quality and price, and we're winning across all income cohorts.

Now even more specifically, we called out a couple of years ago that we were going to focus on category leadership in certain categories, denim, active and kids and baby. And these have really been driving the strength of the brand. In both denim and active, Old Navy gained share for the second year in a row, we rank as the #3 denim player in the country and the #5 in active. The broad-based selection and relevant denim offerings are really establishing Old Navy as a denim destination. And we believe that we've got a lot more room to grow.

Our innovation and price value are really enabling Old Navy to win in the active space which is already an enormous business, the #5 player in the space and growing share and outpacing the rest of the brand, and you're going to see a lot more excitement from us in this category going forward. And kids and baby, Old Navy continues to be the brand leader in kids and baby. We rank as the #2 brand in the country. I think I've shared our partnership with Disney is such a great partnership, but we recently became Disney's #1 apparel direct-to-consumer partner in the U.S. So from a licensing and strategic partnership perspective, there is enormous opportunity for us to continue to go after in relation to the kids and baby market using entertainment and entertainment properties as a lever.

We are very well positioned to deliver the consistent performance that you've been seeing, building on the strength demonstrated over the past 2 years. And I think it's a very reliable brand with an aspiration to accelerate our growth longer term. We'll focus on these categories that I mentioned, but by no means are those the only categories that we intend are growing.

Your next question comes from the line of Dana Telsey with Telsey Group.

One of the interesting things is that with the return to growth this year, the commentary that will be flat net store closures versus last year I believe is just over 30%. How you -- and you mentioned in the CapEx investments, technology seem to be more front and center than stores. How are you thinking of the store portfolio and growth and the CapEx investments? And how does it differ by brand?

Dana, I'll start and then Katrina can fill in a little bit. And as I mentioned before, stores are such an important way for our customers to experience our brands. Obviously, they bring great product storytelling and service to life. It is an omnichannel experience as we connect the digital dialogue with our in-store dialogue with a company like ours operating a fleet of nearly 2,500 stores we are always optimizing our retail footprint.

We're closing underperforming stores, as you know. We're repositioning some locations that are more relevant to our customers, and we're always evaluating new store openings. To your point, you know this well, we've closed over 350 stores that were unprofitable over the last few years, last year and full year -- we had approximately 35 net closures across our portfolio, and we expect net closures to be flat in fiscal '26. The majority, by the way, of those closures were at Banana Republic. Again, as I mentioned before, we're really at a pivotal moment now. Our fleet is really well positioned -- we've been experiencing new formats and new experiences with our brands, particularly Gap and Flatiron and Cheson and a variety of other locations. Great success that is giving us the confidence that now we could accelerate these rollouts of new store formats in the year ahead, which we believe will continue to excite our customers and also essentially grow our business.

As we've evaluated the store performances that we have tested new formats, we've really got confidence in the revenue and relevance and the strong returns they're driving. We're very much focused on the experience for our customers. And I do believe we're at a really exciting point again in our transformation of fixing a lot of the fundamentals and now moving into continuous improvement to build momentum and celebrate these stores and new store formats.

And I'll turn it over to Katrina for the rest.

Yes. And Dana, as it relates to capital, we are looking to increase capital expenditures this year. We're expecting to spend about $650 million this year. As you say, the big areas where we are spending capital are around technology on our stores, as Richard just said, and then also on our supply chain. The increase in capital year-over-year really is much more related to our stores and technology increases. And the store increases are very much related to a lot of these experiential things that we're starting to accelerate where the tech investments are really ratcheting up in some of these new capabilities that are AI-driven as well as RFID.

So hopefully, that helps as we think about capital this year.

That concludes our question-and-answer session. I will now turn the call back over to Richard Dickson for closing remarks.

Thank you, operator. As we close the first chapter of our transformation and step into the next -- we do so with a brand portfolio that is consistently growing, healthy gross margins, disciplined expense management sustained bottom line performance and strong cash on hand.

Looking ahead, we have a focused, energized team that believes in the future that we're building. Our aspirations remain high. We're positioned to deliver and I'm excited about the opportunity ahead and confident in our ability to capture it. I want to thank our entire organization and all our partners for all of their efforts this quarter and throughout the year, and we look forward to our next call.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.

Good afternoon, ladies and gentlemen. I would like to welcome everyone to the Gap Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to introduce your host Whitney Notaro, Head of Investor Relations.

Good afternoon, everyone. Welcome to Gap Inc.'s Third Quarter Fiscal 2025 Earnings Conference Call. Before we begin, I'd like to remind you that the information made available on this conference call contains forward-looking statements that are subject to risks that could cause our actual results to be materially different. .

For information on factors that could cause our actual results to differ materially from any forward-looking statements, please refer to the cautionary statements contained in our latest earnings release. The risk factors described in the company's annual report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2025, and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission on May 30, 2025, and August 2025 and other filings with the Securities and Exchange Commission. All of which are available on gapinc.com.

These forward-looking statements are based on information as of today, November 20, 2025, and we assume no obligation to publicly update or revise our forward-looking statements. Our latest earnings release and the accompanying materials available on gapinc.com also include descriptions and reconciliations of financial measures not consistent with generally accepted accounting principles.

All market share data referenced today will be from Circana's U.S. apparel Consumer Service for the 12 months ending October 2025, unless otherwise stated. Joining me on the call today are Chief Executive Officer, Richard Dickson; and Chief Financial Officer, Katrina O'Connell. With that, I'll turn the call over to Richard.

Thanks, Whitney, and good afternoon, everyone. We are very pleased to report third quarter results for Gap Inc. that exceeded our expectations across multiple measures, including net sales, gross margin and operating margin. We've done this by executing our strategic priorities with precision and consistency. The reinvigoration of our iconic brands continues to gain strength. Our playbook rooted in purpose, powered by creativity and executed with excellence is working, and it's bringing consistency to how we operate and clarity to how we win.

The momentum in the business is clear from product design to storytelling from store execution to digital engagement. The result is a company that's becoming more agile and performing with increasing confidence. On today's call, as usual, I'll provide an update on our third quarter performance and progress in the context of our 4 strategic priorities. Then Katrina will walk you through our detailed financial results and our financial outlook, after which we will open the call for questions.

Let's start with financial and operational rigor. GAAP Inc. comparable sales were up 5% versus last year. the highest quarterly comp in over 4 years. We were pleased to see our 3 largest brands called Old Navy, Gap and Banana Republic, posting strong positive comps in the third quarter, demonstrating the resilience of our portfolio despite a challenging quarter for Athleta. We delivered operating margin of 8.5% which benefited from growth in AUR as customers responded well to our brand offerings. We continue to strengthen our balance sheet, ending the quarter with strong cash balances of approximately $2.5 billion.

Turning to our next strategic priority, driving relevance and revenue by executing on our brand reinvigoration playbook. This playbook when applied with relentless repetition creates a powerful flywheel, which has resulted in 7 consecutive quarters of comp growth for our portfolio. Our largest brand, Old Navy, had an incredibly strong quarter, reflecting the brand's strength, consistency and continued momentum. Comparable sales were up 6%, with the brand consistently gaining market share over the last 2 years.

Customers responded to the compelling value proposition, resulting in healthy growth in average unit retail and notably across all income cohorts, which is encouraging despite widely reported macroeconomic pressure on the low-income consumer. Old Navy's consistent performance is being delivered by trend-right products, our strategic pursuit of category leadership and compelling storytelling. The quarter began with a robust back-to-school season, reinforcing its leadership position in kids and baby in the U.S. Denim posted its highest third quarter volume in years with growth across the family.

Women's and girls showed particular strength driven by trend-right styles like barrel, wide-leg and baggy fits. Active delivered impressive double-digit growth in the quarter with strength across the family. This demonstrates the strong customer response to the brand's distinctive value proposition in the active market and innovation, including new franchises like Bounce Fleece. Today, Old Navy is the #5 active apparel brand in the U.S. and the #4 brand in the women's active space.

As we begin to drive more growth through strategic partnerships that amplify our brand relevance, our latest Disney collaboration kicked off the holiday season with our Jingle Jammies collection, which is exceeding our expectations, driving excitement across the family and fueling strong performance in the broader sleep category. Another great example is our first designer collaboration with American Design Legend, Anna Sui. The collection brought high fashion design to a broader audience staying true to Old Navy's democratic and accessible brand promise.

The campaign featured rising Gen Z artist PinkPantheress and resonated across platforms. In September, we announced plans for a strategic expansion into the beauty category with a phased launch starting with Old Navy as one of the fastest growing, most resilient retail categories in the U.S. and customer insights that reinforce strong interest in the category, we see a clear and meaningful opportunity to grow in beauty.

We recently expanded Old Navy's Beauty Collection in 150 stores with selectors offering dedicated shop-in-shops and beauty associates. We intend to use this pilot to inform a thoughtful scaling strategy that will take us from seeding in 2026 to accelerating growth in the years that follow. Old Navy's third quarter performance reflects the strength of the team's work, which is clearly resonating. This brand continues to delight consumers and consistently deliver positive comps while reinforcing Old Navy's position as a brand that defines value, style and accessibility in American fashion.

This gives us confidence as we move into Q4 and beyond. Now let's turn to Gap. Gap delivered another standout quarter, reinforcing the reliability of its execution and the compounded strength of our namesake brand. Comparable sales were up 7% on top of 3% comp last year, marking the eighth consecutive quarter of positive comps with growth in average unit retail, consideration, organic impressions and new customers, a clear signal that Gap's momentum is real, repeatable and resonating.

The quarter was fueled by broad-based strength in denim, the centerpiece of our viral campaign, better In Denim featuring global group Katseye. This campaign demonstrated the power of the playbook in action featuring trend-right product amplified by culturally relevant storytelling. With more than 8 billion impressions and 500 million views, Better in Denim culminated in a global cultural takeover and has become one of the brand's most successful campaigns to date, generating significant traffic and double-digit growth in denim. The results speak for themselves. Gap continues to accelerate, attracting a younger, highly engaged consumer, particularly Gen Z, who is discovering us while reinforcing loyalty with our core consumer.

As Gap brand equity and relevance continues to build, the iconic Gap Arch Logo hoodie is a great example of the brand reclaiming its place in the cultural conversation. During the quarter, we marked the 30th anniversary of the Gap Hoodie with our first-ever Hoodie Day. It was a moment that energized our teams, drove connection with consumers and contributed to the notable strength in fleece during the quarter.

Our recent collaboration with Sandy Liang was another highlight delivering strong results and continuing to position GAAP as a platform for creative partnerships that drive relevance and new customer acquisition. For holiday, the brand is leaning into CashSoft, where you'll see continued innovation with extensions into new silhouettes, on-trend sets and vibrant colorways. Earlier this month, we launched our highly anticipated Give Your gift Holiday campaign, a continuation of our effort to bridge the Gap across generations through music, creativity and culture featuring emerging artists Sienna Spiro. Gap's execution of the playbook has been fantastic, and it's been exciting to see the brand building on their success quarter after quarter while continuing to drive distinction and relevance.

It's a brand that knows who it is, where it's going and how to win. And we're looking forward to carrying that momentum into the holiday season. At Banana Republic, we continue to make steady progress. The work to strengthen its positioning leaning into its heritage is paying off. Comparable sales were up 4% in the quarter, reflecting meaningful traction as the brand's reinvigoration takes hold.

Growth was driven by continued progress in the harmonization between men's and women's. Men's elevated fashion designs featuring distinctive textures and fabrications continue to perform well, and we've seen notable improvement in women's as fit and product refinement are resonating, particularly in dresses and wovens. Building on the success of the brand's prior campaigns, the response to Banana Republic's fall campaign with David Corenswet was strong, breaking brand engagement records and fueling growth while expanding cultural reach and resonance. For the holiday season, Banana Republic is leaning into its distinctive position as the modern explorer brand.

Our new campaign shot in a stunning landscape of Ireland captures this essence well with our beautiful product featured in our travel-oriented storytelling, brought to life through dynamic destination-rich content. This approach is driving stronger brand affinity and proving to be highly impactful with our customers. Overall, Banana Republic's third quarter results reflect meaningful progress and continued momentum.

I'm optimistic the brand is well positioned as we head into the holiday season. Shifting to Athleta, Maggie Gauger, Brand President, has begun to make an impact in her first 90 days. She's taking quick and thoughtful action to begin to reorient the brand. This includes reorganizing the talent structure to align with her vision. The team is doing the right work, acting with speed and urgency to drive progress, but this reset will take time. Our focus is on positioning Athleta for long-term success and we're turning it to its rightful place as a premium aspirational brand.

The brand is at the beginning of its reinvigoration journey. We aren't chasing quick fixes, we are taking a deliberate approach to position the brand for the long term. We're confident that the consistent application of our brand reinvigoration playbook anchored in purpose and heritage will guide Athleta forward. This is about returning to what made the brand great to begin with, while reestablishing our clear and distinctive position in the active market.

We're encouraged by the steps Maggie and the team have already taken, and we look forward to the continued impact of their leadership as Athleta's reinvigoration take shape. As we head into the holiday season, our supply chain continues to power strategic advantages, the scale of our global network across sourcing, logistics and fulfillment gives us the flexibility and resilience to operate with confidence.

Our long-standing vendor partnerships and diversified sourcing footprint are enabling us to move with speed and deliver newness at the pace of demand. We've introduced new automation and AI capabilities across our omni fulfillment network from robotic unloaders to advanced storage and retrieval systems, which have increased productivity by nearly 30% compared to just a few years ago. This enables us to meet peak demand with greater speed, agility and precision.

With a fleet of about 2,500 stores globally and the largest specialty apparel e-commerce business in the U.S., we're positioned to serve our customers wherever and however they choose to shop this holiday season. Across Gap Inc., our teams are inspired and energized by the work we're doing, and you can feel it. The work we're doing together to drive the business continues to ignite real energy inside the company, creating a culture that's united, motivated and focused on execution.

This is the culture that is carrying us into the holiday season, where our collective focus is clear when with the consumer, deliver with excellence and keep building on the progress we've made together. In the fourth quarter, we remain focused on executing with excellence. Our Q3 and quarter-to-date performance positions us well for the holiday selling season and gives us the confidence to update our full year outlook, increasing net sales growth to the high end of our prior range and raising our operating margin. We look forward to finishing the year strong and creating a clear runway to the next phase of our transformation as we move into 2026 building momentum. I'll now turn the call to Katrina for a closer look at our financials.

Thank you, Richard, and thanks, everyone, for joining us this afternoon. We delivered exceptional third quarter results, surpassing our expectations across multiple key metrics. Our strategy is working, growing brand relevance, combined with operational and financial discipline, drove our highest quarterly comparable sales performance in over 4 years, up 5%. We saw strong performance across the back-to-school and early holiday periods, underscoring the increasing resonance of our brands with consumers. .

With the playbook now in its second year, we're beginning to see a flywheel of growth take hold at Old Navy and Gap, with Banana Republic gaining traction. We exceeded our gross margin expectations with strong flow-through to our operating margin in the quarter, driven by rigor in the fundamentals. Average unit retail, or AUR, grew again this quarter. reflecting our compelling product offering and the disciplined execution across our teams.

Our brand momentum, combined with our strategic supply chain actions, enabled a significant portion of the tariff impact on our margins to be mitigated. With the strength of our third quarter results and our quarter-to-date performance in mind, we are raising our full year 2025 gross margin and operating margin outlook, with full year 2025 net sales growth now expected to be at the high end of our prior guidance range.

I'll take you through the details of our outlook shortly. We are entering the final stages of fixing the fundamentals. Consistent progress on our strategic priorities has strengthened our position as we move into 2026. We where we will focus on building momentum and creating new growth opportunities.

Now turning to third quarter results. Net sales of $3.9 billion were up 3% year-over-year, exceeding our expectations with comparable sales up 5%. By brand, starting with Old Navy, net sales were $2.3 billion, up 5% versus last year, with comparable sales up 6%. It's exciting to see the brand winning in strategic categories like denim, active and kids and baby, supported by strong execution of culturally relevant marketing and partnerships.

Turning to Gap brand. Net sales of $951 million were up 6% versus last year and comparable sales were up 7%. Relentless consistent execution of the reinvigoration playbook is fueling sustained momentum for the brand, clearly reflected in the better and denim campaign. Banana Republic net sales of $464 million were down 1% year-over-year with comparable sales up 4%. Our foundational work on the brand from elevated product to culturally relevant storytelling is resonating with consumers and drove the second consecutive quarter of solid performance.

Athleta net sales of $257 million decreased 11% versus last year and comparable sales were down 11%. We're focused on applying the playbook with rigor, beginning with the fundamentals as we work to reset the brand for the long term. And while we're eager for results, we are executing a phased plan that will take time.

Let's continue to the balance of the P&L. Gross margin of 42.4% declined 30 basis points from last year but exceeded our expectations. As anticipated, tariffs pressured overall margin levels. However, lower discounting resulted in increased AUR growth driven by the consumers' response to our relevant product and storytelling. Compared to last year, merchandise margins were down 70 basis points due to the estimated 190 basis point impact of tariffs. This implies roughly 120 basis points of underlying margin expansion.

ROD leveraged 40 basis points in the quarter. SG&A increased to $1.3 billion, primarily due to the quarterly timing of incentive compensation and continued strategic investments. SG&A as a percentage of net sales was 33.9%, deleveraging 50 basis points versus last year. Third quarter operating margin of 8.5% was down 80 basis points compared to last year, which includes an estimated 190 basis points of tariff impact. This implies roughly 110 basis points of underlying margin expansion.

Earnings per share in the quarter were $0.62, a decrease of 14% versus last year's earnings per share of $0.72, primarily due to the impact of tariffs. Now turning to the balance sheet and cash flow. End of quarter inventory levels were up 5% year-over-year, primarily attributable to higher costs due to tariffs. Our disciplined inventory management resulted in slightly negative unit inventories, and we believe we ended the quarter with the right inventory composition.

We continue to be rigorous in our approach to inventory for the balance of the year. As we shared on our second quarter call, we've tightened the way we purchase unit inventory to ensure maximum flexibility for various demand scenarios and to enable us to be more responsive to consumer demand. We expect to operate in line with our inventory principle of unit purchases positioned below sales. The last 2 years have been about fixing the fundamentals, which includes strengthening the balance sheet. We ended Q3 with cash, cash equivalents and short-term investments of $2.5 billion, an increase of 13% from last year.

Net cash from operating activities was $607 million year-to-date. And our free cash flow of $280 million year-to-date demonstrates the rigor we have put into managing the business. Capital expenditures were $327 million year-to-date. With regard to returning cash to shareholders, in the third quarter, we paid $62 million to shareholders in the form of dividends, and the Board recently approved a fourth quarter dividend of $0.165 per share. Year-to-date, we have repurchased 7 million shares for approximately $152 million, achieving our goal of offsetting dilution.

And while we've achieved our goal, as always, we remain opportunistic. Now turning to our outlook for fiscal 2025. I am pleased with the strength of our Q3 results and solid quarter-to-date performance, which are giving us the confidence to update our fiscal 2025 outlook. We've been operating against a dynamic backdrop for the last few years, and we're expecting the same for the fourth quarter. Our outlook assumes a relatively consistent macroeconomic environment, but acknowledges the potential for increasing uncertainties related to consumer behavior in global economic and geopolitical conditions.

As a result, we continue to take a balanced view with our guidance and remain focused on controlling the controllables. Starting with full year 2025 net sales, we are increasing our outlook to the high end of our prior guidance range, and now expect net sales growth of 1.7% to 2% year-over-year. Our outlook assumes ongoing strength at Old Navy, Gap and Banana Republic and a longer recovery at Athleta.

Moving to gross margin. With our strong Q3 performance, we are raising our full year gross margin outlook. We now expect deleverage of about 50 basis points year-over-year driven by an unchanged estimated annual net tariff impact of approximately 100 to 110 basis points. Excluding the impact of tariffs, this would imply underlying gross margin expansion of approximately 50 to 60 basis points versus last year.

Turning to SG&A. We continue to expect SG&A to leverage slightly for the full year. As discussed on last quarter's call, we are driving continuous improvement in the cost structure of the company this year as we rigorously drive $150 million in cost savings in our core operations. Through efficiency and effectiveness, we remain committed to reinvesting a portion of the $150 million into future growth projects, including beauty and accessories as we pursue the long-term success of the company.

A portion of these savings will also offset continued inflation. Now I'll turn to fiscal 2025 operating margin. We now expect an operating margin of about 7.2% for the full year, an increase from our prior guidance range of 6.7% to 7%. This continues to include the estimated net tariff impact of approximately 100 to 110 basis points. Excluding the impact of tariffs, this would imply meaningful underlying operating margin expansion of 80 to 90 basis points versus last year.

Our income tax rate outlook for the year has increased to approximately 28% and primarily reflects the impact of changes in the amount and mix of our geographic earnings. This increase of 1 point versus our prior outlook of 27% represents an approximate $0.03 headwind to EPS looking to 2026, as we shared on our second quarter call, we do not expect the annualization of tariffs in 2026 to cause further operating income declines. And we now expect the majority of the mitigation to come from adjustments to our sourcing, manufacturing and assortments with the balance driven by targeted pricing.

We continue to be mindful of price elasticity and remain focused on maintaining the overall value proposition for our customers. And while pricing is a lever to manage AUR, it's one of many we've been using to manage margin over time. Other levers include assortment mix, full price sell-through, promotions and inventory management. Our third quarter AUR performance and the momentum of our brands gives me confidence that our AUR growth plans are achievable.

There will be a timing dynamic to the tariff impact on gross margin in 2026. We estimate a Q1 net tariff impact similar to Q4, followed by meaningful benefits from our mitigation efforts in Q2. The back half of 2026 should turn to a tailwind as our actions build and we lap most of this year's tariff impact.

In closing, our Q3 results reflect strong execution at our reinvigoration playbook, driving consistency and growth across our largest brands. Continued cost discipline is enabling reinvestment in strategic growth opportunities, while our scale and supply chain strength support ongoing tariff mitigation.

When we perform with excellence, it builds confidence, confidence fuels execution, execution drives growth. This flywheel is the engine of our momentum. As we look to deliver this holiday season, we remain focused on operational excellence and advancing our ambition to become a high-performing company that delivers sustainable, profitable growth and long-term value for our shareholders. I'd like to thank the team for their commitment to excellence and delivering results in support of our transformation journey. With that, we'll open up the line for questions. Operator?

[Operator Instructions] And our first question comes from the line of Alex Stratton with Morgan Stanley.

Great. Congrats on a nice quarter. Maybe for Richard or Katrina, can you just dig in a little bit more on what drove such a strong comp acceleration at the Gap banner. And also how you think about sustainable comp level for that business over time? And then maybe for Katrina, just what surprised the upside versus your initial expectations on gross margin. Curious if tariffs played a role and how you think about steady state on that line item from here?

Alex, thank you. First off, I think it's clear our strategy is working, and it is showing up in the momentum that we're seeing in our results. All 3 of our largest brands exceeding expectations, Old Navy up 6%, Banana Republic up 4% and Gap delivered another standout quarter with a strong comp of 7%. And that's on top of 3% last year, and it represents the eighth consecutive quarter of positive comps for us. This consistency is setting new records for the brand, and it's reinforcing our confidence in its long-term growth trajectory, driven by compelling product assortments, partnerships and marketing have really resulted in growth across all income cohorts.

We have seen more high-income consumers choosing Gap, and we really do believe that with the strong competitive position that we've taken between premium and value and the fact that we're bridging the generation gap, it's a really exciting time to see Gap continuing to accelerate. We have been attracting a younger, highly engaged consumer, particularly with Gen Z as they discover the brand and it's reinforcing loyalty with our core consumer. So the performance in the quarter, which, as you know, was fueled by our broad-based strength in denim, the centerpiece of our viral campaign, Better in Denim featuring the global group Katseye did incredibly well.

I mean we generated more than 8 billion impressions. I think we had over 500 million views. It was the denim story everybody wanted to be part of. We increased our ranking in the denim category. Gap is now the #6 adult denim brand in the U.S., up from 8 last year. Collaborations are continuing to drive relevance and revenue with our latest collaboration this quarter with Sandy Liang, which was incredibly successful, again, attracting new younger customers to the brand, and it's exciting to see the brand just continuing to build on their success quarter after quarter, and we're looking forward to carrying that momentum into the holiday season and beyond.

As it relates to -- Sorry, I'm going to finish up, Alex, for you on gross margin. So for gross margin in the quarter, we did exceed our expectations in gross margin by over 100 basis points, and that was actually driven by an in-line expectation as it relates to tariffs. So [ tariffs of ] 190 basis points were as expected. But the outperformance in the quarter really came from standout performance, particularly at Old Navy and Gap and better-than-expected AURs as consumers really responded to our product and storytelling, which enabled us to have lower discounting in the quarter.

And our next question comes from the line of Bob Drbul with BTIG.

I was just wondering if you could expand a bit more on AUR trends, how you're managing AUR trends. And I guess just the growth plans that you've spoken about as you look forward maybe Q4 but even into '26.

Thanks, Bob. We approach pricing as we always have. I mean, we consider all the various inputs while maintaining our overall value proposition for consumers. And in Q3, as our brands continue to gain more relevance and the rigor that we put around inventory management, as that becomes more foundational we are increasing our price elasticity, and we've been driving our sell-through at full price. We did take select pricing in Q3 in select categories, denim, which saw double-digit growth and the strength of our execution is really resonating with customers, and we saw growth, as I mentioned, across all income cohorts.

The sales were driven by both units and AUR. We had overall AUR improving versus last year. We saw particularly strength in Old Navy and Gap with customers that were really responding well to our style, the quality and the value which we continue to advance. Banana Republic AURs also were strong. This is resulting in less discounting, better regular price sell-through and it's giving us confidence that we can continue to drive AUR growth as we enter the fourth quarter.

And our next question comes from the line of Matthew Boss with JPMorgan.

Congrats on a really nice quarter. .

So Richard, could you speak to drivers of the top line inflection that you saw at Old Navy this quarter, any change in momentum, early holiday and relative to the consistency that you've now clearly shown at the Gap concept, I guess how do you see Old Navy differentiated as it relates to the market share opportunity for that brand?

And then, Katrina, just given actions that you've taken to the cost structure, how best to think about annual operating income dollar growth is low single-digit top line was the baseline multiyear moving forward?

Matthew, thank you for the question. And thrilled to talk about Old Navy. We had an incredibly strong quarter. Comps up were 6% with the brand consistently gaining market share over the last 2 years. It is the #1 specialty apparel brand in the U.S. And the performance this quarter really speaks to the brand's strength, consistency and continued momentum. Customers are responding to what Old Navy does best. We give great style at great value. We saw healthy growth across all income cohorts.

In AUR, it was driven by trend-right product, which, again, was amplified by compelling, creative and better storytelling for our brands. we've been winning in the categories that we've been strategically pursuing with intent. And we've shared those along the way, kids and baby, denim and active have all been driving the momentum. Active in particular was a standout in the quarter. We delivered double-digit growth, and I believe it's underscoring the power of our value proposition and innovation. Differentiation as it relates to the market share opportunities that we see, we look at partnerships, Disney's partnership with us.

We just presented Jingle Jammies, which was an incredible presentation across the family. It exceeded expectations. We just also introduced Anna Sui's collaboration with us, which was particularly meaningful as the first designer collaboration where we're bringing high fashion to a broader audience. All of this, while we're just beginning to expand the brand into beauty, which, of course, is early days, but we see incredibly high potential opportunity for Old Navy for that category and the broader portfolio over time.

So look, I'm thrilled with Old Navy's consistency in the quarter performance. And I actually am particularly excited about our holiday offering at giftable price points and we are ready to execute with excellence.

And then, Matt, as it relates to your other question, I would say as you called out, we've done a lot of restructuring over the last few years. And then this year, we previewed that we're saving about $150 million in our cost structure. We are reinvesting a portion of that into future growth opportunities because we want to be able to see this next phase, which we're saying is building momentum that we hope over time leads to accelerated growth.

So balancing the savings with what we think are important investments for the long term. What I would say is this year, the operating margin that we've guided to of about 7.2% is really only modest deleverage compared to last year, and that's while absorbing $100 million to $110 million basis points of operating -- excuse me, of tariff impact, which does show the way we are managing the business with rigor, both through cost and margin improvements.

As we look forward, we've also said that in 2026, we don't expect the annualization of tariffs to cause further operating income declines as we work hard to mitigate those costs. Once tariffs are fully reflected in the base, we do believe the consistency in our core combined with top line benefit related to the high potential growth opportunities that we're seeding in '26 should provide sales growth that benefits operating income over time. So more to come on what that algorithm turns out to be, but we feel good about the work we've been doing, and we're certainly pleased with our results.

Our next question comes from the line of Brooke Roach with Goldman Sachs.

Richard, how do you feel about the store fleet today across brands and banners? Are there any investments that need to be made to fuel the momentum from a shopping experience perspective? And what does that mean regarding store fleet transformation, whether that's remodels or changes in store count as you look ahead into 2026?

Brooke, thanks for that question. Stores are a really important way for customers to experience our brand. I mean they bring our product, storytelling and service to life in a way that digital just can't. With a company operating a fleet of about 2,500 stores, we are always optimizing our retail footprint. We're closing underperforming stores. We're repositioning some locations that are more relevant to our customers, and we evaluate new store openings.

As you know, over the last several years, we've closed about 350 stores that were unprofitable. Last year, we closed about 56 stores across our portfolio. We expect to close approximately another 35 in fiscal '25 with the majority of those closures being specific to Banana Republic. I believe we're at a pivotal point right now where the fleet is really well positioned, and we've been testing new formats and experiences. Gap Flatiron in New York has been functioning for about a year with great learnings that we've started to expand across our Gap fleet with denim shops, new refresh shop here in San Francisco and a variety of others that are on plan.

Banana Republic, specifically in Soho and other locations that we've been refreshing with some great results, and of course, Old Navy and Athleta up [indiscernible]. We continue to evaluate these tests and their performance and are getting more and more confidence in the revenue and relevance and the strong returns that they've been driving. We've begun to invest rationally and selectively in the areas that we think will drive the return that we're looking for. And we will continue to keep everybody posted as we look to the combination of repositioning our stores, refreshing must-win stores and again, looking to start to open up new stores where it makes sense strategically

And our next question comes from the line of Adrienne Yih with Barclays.

Congratulations. Great to see the progress at the right time. Richard, my question for you is sort of a little bit higher level since you've come, there's such a focus on product and marketing, like the combination of the flywheel effect of those. How is the appointment of design and creative, specifically Zac Posen can change the complexion accretive thinking throughout the organization? And then the marketing piece of it, how has that kind of -- how does that complement kind of the product and creating that flywheel?

Thank you, Adrienne, for the question. First off, let's just mention Zac. He's been an incredible addition to our leadership team. It's been almost 2 years ago now that he's joined and has brought significant impact on many creative aspects, I would say, both inside the company and beyond. .

Our objective collectively with Zac and by elevating the creative conversation across our brands, highlighting design and product is an incredibly important attribute to all of our brands has been working. I mean we've been culturally creating moments, curated moments where our brands and our products have taken center stage not only to some extent on the runway, but on Main Street, and we're attracting talent as well to our portfolio that might not have considered a place like Gap, Inc or our brands prior.

When we talk about marketing, which I also -- I'm pleased to talk about, we know marketing is a much more complex function today than it was in the past. And as you know, we've been working really hard at driving new narratives that put our brands back into the cultural conversation, and it's our job to be everywhere that our consumer is with the right creative messaging. I think it's obvious we're performing while we transform.

We're driving digital dialogue messages with social media as the #1 platform for our consumers, influencer content is among the most common product discovery methods amongst Gen Z and millennials, which we've been performing incredibly well with. We actually recently launched a cross-brand content creator and social media advocacy program last month, which you might have seen. We now also have a presence on [ TikTok ] as a shop and many more, and these methodologies are proving really impactful, but they also require higher-quality accelerated amounts of creative -- and lastly, we can't help it, but mention again, Katseye is a great example of that. I mean, 8 billion impressions, 500 million views. This was a true cultural takeover.

And I think it's another proof point in our playbook. And we believe we've got the means and the experiences and the brands to continue to be more effective and be more efficient in our spend as we've proven. This methodology is working and it will continue to propel us into the future.

And our next question comes from the line of Dana Telsey with Telsey Group.

Congratulations on the nice progress. Katrina, one for you, one for Richard. As you think about the tariff mitigation strategies, which seem to be effective, the pricing adjustments have seemed to become less and less. Is that the right impression and how you're thinking about pricing going forward? And then Richard, the acceleration in store sales is impressive. In your view of the consumer overall, how are you thinking about the consumer? Does it differ by brand, lower and higher income customer whether it's Gen Z, millennial or baby boomer. How do you think the current feeling and in attitudes towards merchandising, how do you think of consumer demand?

Dana, thanks for the question. I think I'm going to jump in here and take consumer first, and then Katrina can follow up with tariff mitigation answers. First, I think it's really important to share, we're seeing consistency and strength in our customer behavior. As I mentioned, I'm really proud that we're winning with all income cohorts, and you could see it with the strong differentiation within our portfolio.

Together, we see equal growth across low, middle and high, and it's evidenced by our 2 largest brands, Old Navy and Gap. Now there is external data that points to, of course, the macro pressure on the low-income consumer, but our customers are finding our price value, our product, our styles, it's breaking through the competitive landscape, and we're winning. We're also doing this data with less discounting.

We've got better regular price sell-through increased AUR, which is really indicating that our product is resonating. I think you can see it when you go into our stores, we're just telling better merchant-driven stories and it is supported by incredibly relevant marketing. We're also excited to see that the high-income consumer is discovering our fashion quality and value. And we think that is also being driven by the relevant narrative that we've been creating in the marketplace.

So when I step back and I look at our portfolio competitively, I think our portfolio appeals to a wide range of consumers. It gives us greater flexibility in today's environment. When we look at our portfolio today versus even a few years ago, we are a much stronger portfolio of brands today. We're resonating with consumers, and it's our job on a day-to-day basis to create great product with great style and quality, exceptional value. And I think we will prevail in any marketplace if we stay consistent and true to that narrative.

Over to you, Katrina on tariffs?

Sure. So as it relates to tariffs, we did do a slight amount of pricing in the quarter, but we really honestly [ didn't ] approach pricing as we always do. We look at all the various inputs really with an eye to maintaining the overall value proposition for our consumers. So we did take select pricing in select categories. I think denim is a really good example at Gap, where given the strength we were able to take slight pricing and see double-digit growth in sales in spite of that. The strength of our execution, as Richard said, really is resonating with our consumers. .

And as Richard said, we saw sales come from both units and AUR in the quarter. I would say the bigger driver of the outperformance in the quarter and what we're seeing is less discounting and better regular price sell-through. And I think as Richard said earlier, that really gives us the confidence that we can keep driving AU growth as we enter the holiday season.

And our next question comes from the line of Lorraine Hutchinson with Bank of America.

Just switching gears to Athleta for a minute. How do you feel about the level and content of the inventory there? And do you have a time line for where you think that sales could begin to stabilize?

Lorraine, thank you for that question. We're not hiding from Athleta. It's a very important brand in our portfolio. We have been disappointed in the trend. But Maggie, our brand President, has hit the ground running in our first 90 days, and she's balancing near-term priorities with, of course, the longer-term reinvigoration objectives that we have for the brand. As I mentioned, she's been building her leadership team to align with her vision and she is truly setting the foundation for the brand's next chapter.

A lot of work happening, editing the assortment, studying the consumer, evaluating our retail footprint and of course, the overall customer experience. This is a reset year for Athleta, and our focus is going to be on positioning the brand for long-term success and returning it to a rightful place as a premium purpose-driven aspirational brand. We do believe Maggie and the team are taking the right steps, and we remain confident that Athleta will emerge as a brand that really does matter even more to women through product, trend and storytelling. We understand there's a lot of work to do, but we believe we've got the right leader in place to do it, and we look forward to continuing to update you as more news unfolds.

And maybe what I'd add, Lorraine, on inventory is as we assessed Athleta in second quarter, given sort of the trend in the business, we did make some choices to lower inventory levels overall. And so we have aligned inventory for Athleta to this lower sales trend as we head -- for Q3 and as we head into Q4. So we feel good about the levels and quality of inventory at Athleta and will remain pretty prudent as it relates to Athleta, until we start to see the product and the marketing get back to where we would expect it to be for this brand.

And our next question comes from the line of Paul Lejuez with Citigroup. .

Just to go back to the unit comments. Curious which brand you saw the greatest increases in units. And then I'm also curious on the [ inventory for unit ] gap that you mentioned, what will that look like at the end of the year as we finish up fourth quarter and then into the first half of '26?

Paul, I'm going to take the first one, but we had a lot of trouble hearing your second question. So apologies on that one, we're going to ask you to repeat it. As it relates to units, we were really pleased to see that as our brands are gaining relevance combined with the rigor that we're putting into the business that we're seeing our elasticity improve, and we're getting higher sell-throughs at regular price. .

When we look at the units in the quarter, I would say units were aligned with where we see outperformance in the business, particularly at Old Navy and Gap. And we also saw AURs there as well. But I'm going to ask you to repeat again the second part because we couldn't hear you.

Sure. Sorry, Katrina. So the inventory dollars versus unit gap that you spoke of this quarter, curious what that looks like at the end of 4Q and then into the first half of next year.

Sorry about that. So we continue to keep our units below sales as we try to keep within our principles of keeping inventory tight. We want to keep maximum flexibility so that we can respond in season to various demand scenarios and be responsive to consumer demand. So as we think about end of quarter inventory, I would expect it to be similar to how we just ended Q3. .

And our next question comes from the line of Corey Tarlowe with Jefferies. .

Richard, I wanted to ask about the power of partnerships. And the reason being is I don't think that there's a retailer in the mall today that has done more partnerships in the time spend that you've been at Gap to expand the aperture for the brand and to build, as you say, relevance in revenue. And I was curious about what you think strategically, this means for the business ahead. And then the follow-up to this is how have the consumers responded to these improvements in the brand in the way that you've been able to, say, remove promos on categories like denim at Gap.

Okay. Cory, thank you for the question. First off, I think it has been a credit to the brands and teams that have followed the methodology that we shared with our playbook. And as part of the playbook and when we look at cultural relevance, collaborations help a brand drive relevance. It broadens its customer base, and continues the drumbeat between its larger partnerships and releases. So it keeps topical in the context of the amount that we do and the timing that we do do them.

Now you have to really be authentic. It's not just a collaboration. It's a well-thought-out strategic partnership. To date, Gap brand, as you mentioned, we've launched over 13 collaborations. It continues to drive enormous excitement and attract new audiences to us. And they're very precise and they need to be. They need to be win-win. And most importantly, they need to be authentic to the consumer. The collaborations that we've been doing, as I mentioned, are attracting new generations to Gap, but it's also, at the same time, reinforcing the brand to those who love us for years. This is, to some extent, a balance of art and science.

The latest collaboration this quarter with Gap brand with Sandy Liang in the third quarter. It drove incredible engagement and overall basket. You asked about consumers responding in relation to it and how it affects our business. I mean, more than 25% of the customers who shop these collaborations were new to Gap. And of those, who shop the collaborations, 20% shop beyond the collab. So we see the attraction that these collaborations when done right are generating for the brand.

And then we -- by offering and showing other product, we're now establishing broader, bigger house files and more exciting relationships with our consumers. We just launched the Anna Sui collection with Old Navy, which is the first designer collaboration in Old Navy, incredible success, similar engagement, a really well-thought out precise partnership and we believe a sign of things to come.

So again, laddering up, it's great credit to the teams across the brands for driving the playbook, executing it with excellence and really creating win-win collaborations for the consumer and our business.

And our final question comes from the line of Michael Binetti with Evercore ISI.

Carson on for Michael. Katrina, probably a question for you. I appreciate the color on the wraparound effect of tariffs into 2026. But if we set tariffs aside, we had really nice underlying gross margin expansion in the third quarter. The guidance implied it's pretty similar for fourth quarter, [indiscernible] underlying expansions from AUR versus other drivers? Because I think I've heard several times today confidence in the AUR plan. So if that's the leading driver, it is safe to carry those impacts over into the next few quarters?

Thanks for the question. So the way I would answer that is our margin strength in Q3 came from a combination of favorability in commodities, aided by some supply chain leverage that we got as well as strength in AUR. As we look to Q4, what you'll see is that the tariff impact to Q4 is similar to what we just experienced in Q3. And we're also still seeing the commodity benefits. But in Q4, we're trying to sort of stay balanced in our outlook. And so right now, what we have in is roughly similar promotions year-over-year so that we have room to compete in any environment. And so we'll obviously aspire to do better. But the upside that we saw in AUR from Q3 is not currently assumed in Q4.

And ladies and gentlemen, that concludes our question-and-answer session. I will now turn the conference back over to Mr. Richard Dickson for closing remarks.

Thank you, operator. This was an exceptional quarter, and I'm really proud of this talented team that continues to deliver quarter after quarter, as we look to finish the year strong, our team is fired up and our focus is clear: continue to execute with excellence and win with the customer this holiday. Thank you for joining us today. For those of you who celebrate wishing you a happy Thanksgiving and we look forward to seeing you in our stores this holiday season. Thanks all.

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.