Gap Shares Plummet 21% After $300 Million Tariff Warning Despite Strong Q1 Results

Gap's $300 Million Tariff Shock: The Hidden Costs Behind Friday's Retail Bloodbath

The floor of the New York Stock Exchange turned into a sea of red Friday as Gap Inc. shares plunged 21% in a single trading session (now recovered to -19%), erasing all gains for the year and wiping billions from the retailer's market capitalization. The catalyst: a stark warning that newly reinstated tariffs could cost the company up to $300 million, transforming what should have been a victory lap for the retailer's turnaround story into a cautionary tale about global trade risks.

The Anatomy of a Sell-Off

The carnage began Thursday evening when Gap executives revealed that tariffs could create between $250 million and $300 million in gross incremental expenses this year. By mid-day Friday, more than one-fifth of the company's value had evaporated, with the stock touching an intraday low of $22.44.

"What we witnessed today was classic market myopia," observed a veteran retail analyst who requested anonymity. "Investors fixated entirely on the tariff headline while glossing over Q1 results that exceeded expectations on virtually every metric."

Those results included earnings of 51 cents per share (versus 45 cents expected), revenue growth of 2.2% to $3.46 billion, and comparable sales increases of 2% company-wide. The Gap brand itself showed remarkable resilience, posting a 5% sales increase, while Old Navy—the company's largest division—grew by 3%.

Between Two Administrations

For Gap, the timing couldn't be more precarious. The retailer had been executing one of specialty apparel's more impressive turnarounds, with shares surging 30% earlier this month as investors rallied behind product innovation and operational improvements.

"They're caught in the crossfire of trade policy whiplash," explained Marcus, chief investment strategist at a leading fund. "The legal status of these tariffs remains deeply uncertain after a U.S. trade court initially blocked them, only to have an appellate court reinstate them the next day."

This regulatory uncertainty has created a bifurcated response among retailers. Some, like Best Buy, have incorporated tariff impacts into their forecasts. Gap chose the opposite approach, maintaining its full-year guidance of 1-2% sales growth and 8-10% operating income growth while explicitly excluding tariff effects.

The Supply Chain Scramble

Behind the scenes, Gap has been aggressively diversifying its manufacturing base. Less than 10% of the company's merchandise now comes from Chinese factories—down from approximately 21% three years ago—and executives project this exposure will fall below 3% by year-end.

"We're accelerating a supply chain transformation that was already underway," CEO Richard Dickson told investors. "This includes increasing our procurement of U.S. cotton and ensuring no single country represents more than 25% of our sourcing by 2026."

Despite these measures, the company believes it can only mitigate roughly half of the tariff impact, leaving a net operating income hit of $100-$150 million, primarily affecting the second half of fiscal 2025.

The Valuation Equation

For professional investors, the critical question is whether Friday's sell-off fully prices in the tariff risk or presents an overcorrection.

The math is straightforward but sobering: a midpoint impact of $125 million translates to approximately $92 million after tax, or about $0.24 per share—a 12% reduction from the consensus estimate of $1.98 for fiscal 2025. At a forward price-to-earnings multiple of 12, this suggests an intrinsic value of approximately $21, close to where the stock bottomed on Friday.

"The first-order effects appear priced in," noted Eliza Harmon, portfolio manager. "What remains uncertain are the second-order impacts: Will consumers absorb modest price increases? Will promotional activity intensify to maintain traffic? These questions will determine whether this is a buying opportunity or a value trap."

The Hidden Variables

Several factors complicate the investment case beyond headline tariff figures. UBS analyst Jay Sole has highlighted that Gap's Athleta brand "likely needs much reinvestment" to drive consistent positive comparable sales. The company's current struggle with the athletic wear division—which saw an 8% comparable sales decline in Q1—suggests additional margin pressure ahead.

Meanwhile, agricultural forecasts from the USDA show planted cotton acreage down 11.5% for the 2025/26 season, with drought risks in Texas potentially pushing prices from the current 82 cents per pound toward 90 cents—further compressing gross margins for apparel retailers.

The Path Forward

For Gap, the road ahead involves delicate balancing acts: between price increases and sales volume, between investment in struggling divisions and overall profitability, and between short-term financial engineering and long-term brand equity.

"We do not anticipate any substantial price increases or adverse effects on our customers," Dickson insisted to CNBC, though retail history suggests this optimism may prove challenging to maintain.

For investors, the calculus is equally complex. The stock now trades at an 11.7x forward P/E—a 15% premium to competitor Abercrombie & Fitch despite inferior margin structure and higher exogenous risk. This suggests that even after Friday's dramatic correction, Gap shares may still harbor valuation risk relative to sector peers.

As one portfolio manager put it: "For the next two quarters, watch the courts, not the catalogs, for the next big move in Gap stock."