Gap Inc. witnessed a sharp drop in its stock price, falling 15% during after-hours trading, despite surpassing first-quarter sales expectations. This decline reflects investor concerns over the potential financial hit from U.S. tariffs, which could adversely affect the company's gross margins in the upcoming quarter. Reuters highlighted that these concerns emerged even as Gap reported better-than-expected results, driven by strong demand for its Old Navy and namesake brands.

The retailer anticipates a financial impact from tariffs amounting to between $250 million and $300 million. However, Gap plans to counteract more than half of these added costs through strategic initiatives, striving to soften the blow on its earnings. For the recent quarter, Gap recorded a 2.2% rise in revenue to $3.46 billion and earnings of 51 cents per share, both figures outperforming analyst projections.

Nonetheless, fears over tariffs loom large, with Gap reiterating its fiscal 2025 outlook of 1% to 2% sales growth and 8% to 10% operating income growth, excluding tariff implications. On a positive note, sourcing less than 10% of its merchandise from China could help the company alleviate tariff-related pressures. This strategic supply chain diversification might serve as a buffer against the full brunt of the tariffs, according to analysts cited by TipRanks.