Gap (GAP) traded down about 4% Tuesday as the market continued to focus on the company’s near-term profitability headwinds, particularly the tariff-related pressure management highlighted in its latest outlook. The selling comes as investors weigh whether the current earnings power can hold up if gross margin compresses in the first quarter.

In its fiscal Q4 and full-year fiscal 2025 update on March 5, 2026, Gap laid out a first-quarter setup that implied a meaningful step-down in gross margin—down roughly 150 to 200 basis points—driven in large part by an estimated ~200 basis points of net tariff impact. That framework has kept the stock sensitive to any shift in macro sentiment around discretionary retail and trade policy, because even modest demand softness can amplify margin pressure when product costs are rising.

Traders are now looking for evidence that mitigation efforts (sourcing changes, pricing actions, and tighter inventory/discounting) can blunt the tariff drag without hurting traffic. The next major checkpoint is whether early-quarter results validate the company’s ability to protect merchandise margin and operating margin while still delivering its broader fiscal 2026 growth and profitability targets.