The Gap, Inc. (GAP) Q4 2025 Earnings Report, Transcript and Summary

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 Circana'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 Dickson; 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 fund. 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 continue 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 dressing Leon Thomas for the Grammys and Claire Danes for the Golden Globes, to co-hosting a star-studded Super Bowl event in San Francisco to spotlighting emerging artists from Tyla and Troye Sivan to KATSEYE and Siena Spiro. Gap is showing up in culture in ways that are authentic and relevant. In the fourth quarter, the team executed our playbook with Fluency, which was demonstrated through their Give Your Gifts 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 could 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, suede, 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 re-architecting 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, 2 categories that are underdeveloped in our portfolio but are meaningful to our consumers and sizable in the industry. We will also continue advancing our Fashiontainment 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 Fashiontainment 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 Fashiontainment 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 Fashiontainment 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. Optimize 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%, 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 continued 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% 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 IEEPA 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 pledged 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, Fashiontainment 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. 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%, 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 purposely 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, fashiontainment, technology. Can you talk about how you're balancing investments to maintain momentum in the core while also seeding 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've 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, fashiontainment, 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 seeding. 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.

Thanks, Mark.

A quick follow-up for Katrina 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 headwind, 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 are 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 two 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 at 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 #6. 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 rollouts 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 outpace 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 3% 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 this stuff, but we are 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. And 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 Fashiontainment 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 KATSEYE or a fashion show during the NBA All-Star weekend, these are great examples of Fashiontainment. We're serious about it. We appointed Pam Kaufman as our Chief Entertainment Officer, to lead our Fashiontainment 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. Given Gap's brand momentum, we have the confidence to start to accelerate the rollouts 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 the beauty offering, the category represents anywhere from 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 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 at 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?

Brooke, 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 Brooke, 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 on 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 it will be flat net store closures versus last year, I believe it was just over 30. 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?

Thanks, 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 products, 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 in full year '25, 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 Chestnut 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. 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.