August 28, 2026
Strip the 1,140bp IEEPA windfall and you find a 20bp margin business with half its revenue in turnaround mode.
First a note from Behind the Markets
Hey There Friend,
Every data center in America needs one piece of equipment before it can power a single chip.
A large power transformer.
Before 2020 the wait was about 140 weeks.
Today it is more than 160. And climbing.
The biggest units run five years.
A child born the day you sign the purchase order is speaking in sentences before the crate arrives.
Now the part that should worry you.
The United States imports more than 80% of them. Eight of every ten.
This is the tollgate of the entire electrical economy, and America does not control it.
Software moves at the speed of a product launch. Weeks.
The physical layer moves at the speed of a factory. Years.
Technology can only move as fast as its infrastructure.
One company sits on the other side of that gate, holding the only federal license of its kind for the fuel America’s next reactors are built to run on.
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“The Buck Stops Here,”
Kelly Maguire
Behind the Markets
Hey there, bargain hunter. Gap reported a 52-cent quarter Thursday night and the stock jumped about 15%. The 1,160-basis-point gross-margin swing is what drove the excitement. Strip it apart before you buy the move.
The Tariff Math Comes First
The headline is almost entirely a tariff refund. Gap recorded a $417 million IEEPA tariff recovery as a cost-of-goods credit in Q2. That single item accounts for 1,140 of those 1,160 basis points. Adjusted gross margin, the number that reflects actual merchandising decisions, was 41.4%, up just 20 basis points year over year. Adjusted EPS was $0.52, beating the $0.48 consensus, but below the $0.57 Gap earned in the same quarter last year. The beat was against a bar the company had already lowered. An additional $15 million in Section 301 tariff relief from a July 23 rate change is baked into the raised full-year guidance, too.
What the Quarter Actually Showed
Revenue of $3.651 billion fell 2% year over year. Total comparable sales dropped 1%. Old Navy, roughly half of company revenue, posted net sales down 4% to $2.061 billion with comps also down 4%, steeper than the 2% analysts expected. The Gap brand offset the damage with another double-digit comp gain, its 11th consecutive quarter of positive comparable sales. Banana Republic rose 1% with comps up 3%. Athleta fell 12%.
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Full-year adjusted EPS guidance moved to $2.35-$2.45, from $2.30-$2.40. Part of that raise came from a lower share count: Gap has repurchased more than $600 million in stock year to date. Adjusted operating margin guidance moved to 7.4%-7.6%.
The Leadership Wildcard
Gap named Michael Francis president and CEO of Old Navy, effective November 2, replacing Haio Barbeito. Francis joined as chief customer officer in March and spent 26 years at Target, where he helped build its value-meets-trend identity. CEO Richard Dickson called the transition planned and not a reaction to Old Navy’s performance. The market will decide that question when Francis runs his first full quarter.
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Is It Cheap?
Gap closed Thursday at about $20.79 on $2.40 midpoint guidance, so it trades at about 8.7x forward earnings. TJX trades closer to the mid-20s on forward earnings. The discount is real. Strip tariff relief, though, and the normalized run rate is closer to $2.15-$2.20, pushing the true multiple toward 9.5x on underlying earnings. Cheap versus peers; not a screaming value if Old Navy’s execution problems are structural.
Bull, Base, Bear
Bull: Francis imports his Target playbook, Old Navy comps recover to flat by early 2027, earnings power reaches $2.60-$2.70 by FY27. Base: FY26 closes at $2.40 with Old Navy stabilizing, stock drifts to $26-$28. Bear: The fashion-value equation stays broken, Athleta keeps sliding, EPS stalls near $2.20.
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Action Plan
Do not chase Friday’s open. The jump prices in a best-case Old Navy recovery before Francis has run a single quarter. A pullback to $21-$22 gives you a real entry on normalized earnings. If you own it, hold. Trim if Old Navy Q3 comps miss the guided flat-to-down-1% range.
Cheap Investor Checklist
- Old Navy Q3 comp: must improve from Q2’s minus 4%
- Adjusted gross margin ex-tariff: needs expansion beyond the current 20bp
- Gap brand comp: verify the 11-quarter positive streak extends into Q3
- Francis scorecard: February 2027 earnings is the first real read
- Athleta: down 12%; stabilization is the minimum acceptable outcome
- Buyback pace: roughly $400 million authorization remaining
- Normalized vs. guided EPS: watch adjusted operating margin, not the GAAP line
Bottom Line
If Old Navy recovers and the Gap brand holds, single-digit forward earnings is genuinely cheap. If Old Navy’s problems run deeper than a bad dress season, tariff windfalls have been doing the heavy lifting. Buy the pullback, not the pop.
