Gap Inc. announced on Thursday that tariffs imposed by the U.S. government could cost the company between $250 million and $300 million this year.
Despite this, Gap’s management chose not to include these tariff costs in their official financial forecast, a decision that led to a 16% drop in the company’s shares during after-hours trading.
The retailer expects to offset more than half of these tariff-related expenses by diversifying its supply chain and reducing reliance on Chinese manufacturing.
In 2024, less than 10% of Gap’s merchandise was sourced from China. CEO Richard Dickson said the company aims to reduce China’s share of sourcing to under 3% by the end of 2025 and ensure no single country accounts for more than 25% of sourcing by the end of 2026.
Gap reaffirmed its fiscal 2025 sales growth forecast of 1% to 2% and operating income growth of 8% to 10%, excluding tariff impacts. The company expects minimal effect on second-quarter gross margins, projecting them to remain consistent with the first quarter’s 41.8% margin.
In the first quarter, Gap reported revenue of $3.46 billion, beating analysts’ expectations of $3.42 billion. Earnings per share were 51 cents, surpassing the forecast of 45 cents. The company benefited from strong customer demand, especially for its Old Navy and Gap brands, following recent style updates.
Analysts noted that excluding tariff costs from the outlook may have hurt investor confidence. The bulk of tariff-related expenses is expected in the second half of the year, according to CFO Katrina O’Connell, who emphasized the company’s deliberate choice to separate tariff impacts from its core financial guidance.
Tariffs have been a significant challenge for many global retailers, squeezing margins due to added costs in supply chain adjustments, shipping, and stockpiling. While Gap does not plan significant price increases due to tariffs, other retailers like Walmart have announced price hikes to offset tariff-related expenses.
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