Shares of Gap (GAP) took a beating recently, plunging over 20% on Friday, May 30, despite the retailer delivering better-than-expected first-quarter results. The selloff came after management flagged potential incremental costs tied to tariffs, raising concerns among investors.

However, beneath the headline risk, the company’s fundamentals remain solid, and its turnaround plan is working well, making the recent dip an attractive opportunity for long-term investors. Let’s take a closer look.

The Impact of Tariffs on Gap’s Profitability

On its Q1 earnings call, Gap warned that if the current tariff environment persists, with 30% levies on imports from China and 10% from other countries, it could incur an additional cost of $250 million to $300 million for the full year.

While tariffs have introduced new cost headwinds for Gap, the clothing company is focusing on strategic sourcing, optimizing manufacturing processes, and adjusting its product assortments to mitigate the impact of tariffs on its margins. Including these mitigation efforts, the company estimates the remaining net impact to be $100 million to $150 million, with the majority of the effects concentrated in the latter half of fiscal 2025.

Market Reaction Too Extreme for Gap Stock

While the tariff-related cost headwinds are not insignificant, the market’s reaction appears to be too extreme. Gap is far from a company in crisis. Moreover, many of its key turnaround efforts are starting to bear fruit. Its brands are gaining market share, margins are improving, and its solid balance sheet positions it well to invest in growth measures.

Gap’s underlying fundamentals remain strong. The retailer just posted its fifth straight quarter of positive same-store sales, along with gains in both gross and operating margins. Notably, its two biggest brands, Old Navy and Gap, are steadily capturing market share, a sign that its turnaround efforts are resonating with customers.

Old Navy, Gap's largest brand, delivered a 3% increase in comparable sales (comps) in Q1 and has now increased its market share for nine quarters in a row. The brand’s resilient performance suggests that it is resonating well with consumers. The Gap brand itself posted a 5% increase in comparable sales, marking its sixth consecutive quarter of positive comps and its eighth consecutive quarter of market share growth.

Gap’s focus on driving efficiency is supporting its margins. The apparel company reported a 140 basis points year-over-year improvement in operating margins, and the first-quarter earnings per share (EPS) came in at $0.51, up 24% over the same period last year. The company ended the quarter with a strong cash position of $2.2 billion, giving it the flexibility to invest in growth initiatives.

What’s Ahead for Gap?

Looking forward, Gap’s strategy of bringing more innovation, style, and value to customers will likely support its comps and enable the company to continue to gain market share. Further, technology will play a key role in its growth strategy. From AI-powered customer insights and digital product creation to improving inventory management and streamlining operations, Gap is making investments to future-proof its business.

Furthermore, Gap’s strategy to diversify its sourcing footprint will help the company address the tariff concerns that triggered the recent decline in its stock. The company has been reducing its reliance on China for several years, and by the end of 2026, no single country is expected to account for more than 25% of its production.

Conclusion

Given the potential headwinds, Wall Street analysts maintain a “Moderate Buy” consensus rating on Gap stock.

Yes, there are short-term pressures, and its margins could feel some pain as trade tensions linger. However, with significant cash on hand and disciplined capital allocation, Gap is doubling down on the infrastructure and brand-building initiatives that will help sustain its growth in the years ahead.

At current levels, Gap stock appears compelling. Trading at 9.95 times its projected FY26 earnings of $2.24, shares are attractively priced given the progress made on its turnaround efforts and the growth potential ahead.

In short, Gap’s fundamentals are improving, its strategy is delivering, and the market may have overreacted to the latest tariff noise. For investors willing to look past the near-term volatility, this could be a good entry point to buy Gap stock at a discounted valuation.