Gap, Inc. (GAP) is having a pretty good week. The retailer posted third-quarter results Thursday that sailed past expectations, sending shares climbing over 8% higher on Friday.

The numbers tell the story: Gap delivered earnings of 62 cents per share against analyst estimates of 59 cents, while revenue hit $3.94 billion compared to the $3.91 billion consensus. Not bad for a company navigating choppy retail waters.

The Tariff Tightrope

Bank of America Securities analyst Lorraine Hutchinson bumped up her price target to $27 from $23, though she's sticking with a Neutral rating. Why the caution despite the solid quarter? Tariffs.

Here's the tension: Gap is showing positive comparable store sales and better margins, but Hutchinson is watching how tariff costs might squeeze the retailer's price-sensitive customer base. These aren't shoppers with unlimited budgets.

The third-quarter results beat Bank of America's estimate of 56 cents per share, powered by stronger sales and gross margins. But tariffs already took a 190-basis-point bite out of margins. Gap managed to offset that pain through higher average unit retail prices and pulling back on discounts—essentially, selling fewer items on sale.

Holiday Math

Looking ahead to the fourth quarter, Hutchinson expects gross margins to decline 80 basis points as tariff pressures persist. The silver lining? Commodity benefits and fewer promotional markdowns during the holiday shopping season should help cushion the blow.

Raising the Bar

Despite the tariff headwinds, Bank of America raised its earnings outlook. The firm boosted its fiscal 2025 EPS estimate by 3% to $2.14 and its fiscal 2026 projection by 14% to $2.18. Those revisions reflect both the third-quarter beat and an improved gross margin outlook for next year.

Gap shares traded at $24.98 on Friday, up 8.33% as investors digested the better-than-expected results.