August 17, 2026

GAP is a cheap stock, trading at roughly 8.5x earnings and 0.5x sales. The company also has a strengthening core business, a healthy balance sheet, a $1 billion share-repurchase authorization with approximately $600 million remaining (or 8% of $7.4Bn mkt cap), and a resurgent Gap brand. But investors still question what can drive the company’s next leg of growth because its largest brand, Old Navy, remains stagnant. That uncertainty leaves GAP vulnerable to being viewed as a value trap. The potential answer is beauty.

The Beauty Rollout 

When Winning Picks Premium last looked at GAP in October, the Old Navy beauty test was only getting started. Since then, management has spent roughly a year testing different products, pricing and merchandising formats across 150 stores. Now, the company is rolling beauty out across the entire Old Navy fleet, 1,242 stores, by the end of 2026. So, the question investors should be asking is simple: What did management see in those 150 stores that gave it the confidence to take beauty nationwide?

From the CEO

Wall Street is aware of the initiative, but it does not yet know how to evaluate it because management has not disclosed the pilot’s sales, margins or impact on store traffic. That uncertainty creates the opportunity. Let me show you the most important part of the May earnings report, where CEO Richard Dickson answered a question on the “beauty” initiative:

“Now on the beauty space, we are very excited about the expansion of beauty. When we zoom out, this is one of the fastest growing, most resilient categories in the U.S. We have studied our consumer base and the relationship that they have with the beauty category. And so we know that they're expecting and excited for our brands to carry beauty products. When you look at other fashion and apparel retailers with a beauty offering, we know the category can represent anywhere from 5% of the load to 20% of their sales. So when you look at our total volume business and even just at that low, it does represent significant opportunity. But we are taking a very purposeful approach to this, both our assortment and merchandising strategy. It will be a combination in Old Navy of third-party brands as well as our own beauty offerings. We do believe that it could be a really meaningful contributor to the company over time.

We are, of course, rolling out the beauty product into our entire fleet. As you recall, last year, we piloted 150 stores. We learned a lot in that. Now we're taking that and rolling out to the balance of the fleet this year and again, as a mix of third-party and our own brands. And then at Gap, we're expanding it. We're relaunching our fragrance collection, which had a very highly coveted, strong customer loyalty following. Fragrances like Dream, Grass Heaven, Om. we're going to reignite these with incredibly exciting marketing, refreshed packaging, updated formulation, elevated merchandising and storytelling. The presentation will be stand-alone in our stores. We're working with experts and expertise to really execute this with a long-term vision in mind. So stay tuned. I think you'll obviously see the launch of that this fall. And Old Navy will have a full beauty assortment as we progress throughout the year.”

He made a point of telling investors that beauty can represent 5% to 20% of sales at other apparel retailers and that even the low end would be significant for GAP.

Kohl’s - Sephora

Kohl’s offers the clearest comparison for how quickly beauty can become meaningful inside an established retail footprint. Sephora at Kohl’s launched in 200 stores in 2021. They expanded to more than 850 locations by 2023 and ultimately reached more than 1,100 Kohl’s stores. By 2023, Sephora sales had already surpassed $1.4 billion, equal to roughly 8% of Kohl’s annual sales. Management projected the business could exceed $2 billion by 2025, or 13.5% of sales, which is in line with the GAP CEO Dickerson’s statements. But keep in mind, beauty also helped the rest of the store: nearly half of Sephora baskets included merchandise from another Kohl’s category.

Driving Better Economics

Kohl’s showed that beauty can move from a limited launch to a multibillion-dollar category representing a meaningful percentage of company sales within only a few years. Old Navy may have an even more natural customer base for affordable, colorful and trend-driven beauty, particularly among teens, younger families and value-conscious shoppers. If beauty increases visit frequency, basket size and cross-shopping while also carrying attractive incremental margins, it could become far more than a small addition to sales. It could become the growth engine Wall Street has been waiting for.

Options Flow

There’s positioning set up in two areas, September and December. In September, there's been a buyer of 10,000 GAP September 18^th $21 Calls for $1.61. For year end, someone is long 8,000 December 18^th $25-$28 Call Spreads for $0.73 and financed it by selling 2,000 GAP September 18^th $20 Puts at $1.93.

The Trade

GAP has traded in a broad range between roughly $16 and $29 for the past two and a half years. On May 29^th, shares dropped sharply after Wall Street was disappointed by the company’s earnings release and reduced sales outlook. The pressure continued throughout June, as funds likely moved on from the stock ahead of quarter-end. The fact that GAP reached its recent low near $18 on June 30 supports that interpretation. Since then, the stock has begun attempting a recovery and has moved back above $20.

Earnings are in late-August and again in mid-November. Then you have Black Friday and the Holiday season.

The investment question is no longer whether Old Navy is launching beauty. It is whether customers respond strongly enough for beauty to lift comparable sales, basket size and margins. Wall Street may receive its first clues this quarter as the rollout expands, but it will probably take this quarter and the following quarter to see a meaningful number of stores operating long enough to properly judge the opportunity.

This is a bit of binary setup, not unlike our AEO idea around the Sydney Sweeney campaign. Either beauty gains traction or it does not. If it does, Wall Street will quickly begin projecting the type of sales contribution seen at Kohl’s, where Sephora grew into a multibillion-dollar business and reached a meaningful percentage of total company sales.

That would drive earnings estimates higher, support a re-rating of GAP’s depressed multiple and create momentum in the stock.

I like the GAP January 15^th $21 Calls for $2.30. The Target Stock Price is $30.