By Luke Juricic

Investing.com -- Gap Inc (GAP) reported second quarter adjusted earnings per share of $0.52, beating analyst estimates of $0.49 by $0.03. Revenue for the quarter came in at $3.7 billion, matching the consensus estimate, but down 2% YoY. The company raised its full-year adjusted EPS guidance to $2.35-$2.45, up from the prior range of $2.30-$2.40, with the midpoint of $2.40 exceeding the prior guidance midpoint of $2.35.

Shares surged more than 16% in premarket trading Friday.

Comparable sales declined 1% in the quarter, with Gap brand posting 10% comparable sales growth while Old Navy fell 4%. Adjusted operating margin reached 7.1%, exceeding expectations despite the revenue shortfall. The company's adjusted gross margin of 41.4% increased 20 basis points YoY, driven by merchandise margin expansion of 80 basis points.

"While top-line results in the second quarter were modestly below expectations, continued operational and financial rigor contributed to gross margin strength resulting in the Company exceeding profit expectations," said President and Chief Executive Officer Richard Dickson.

For the full fiscal year 2026, Gap now expects net sales to increase 1% to 1.5%, down from the prior outlook of up 1% to 2%. The company projects adjusted operating margin of approximately 7.4% to 7.6%, up from the prior range of 7.3% to 7.5%. The midpoint of the operating margin guidance of 7.5% represents an improvement from the prior midpoint of 7.4%.

Bank of America reiterated a Neutral rating on Gap after the report, saying it is "encouraged by momentum at Gap but remain concerned that Old Navy's lower-end customer will continue to be pressured by the tough macro climate."

Gap brand net sales increased 9% to $844 million, while Old Navy net sales declined 4% to $2.1 billion. Banana Republic net sales rose 1% to $478 million, and Athleta net sales fell 12% to $264 million.

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The company returned $726 million to shareholders year-to-date through share repurchases and dividends, including $262 million in the second quarter. Gap ended the quarter with $2.5 billion in cash, cash equivalents and short-term investments.

Vahid Karaahmetovic contributed to this report.

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