Shares of apparel makers Gap and American Eagle Outfitters dropped 15% and 10%, respectively, in premarket trade on Friday after weak annual forecasts, as consumers curb discretionary spending amid a tough macroeconomic climate.
Gap cut its annual sales forecast, while American Eagle maintained its full-year comparable sales and operating profit outlook but flagged a contraction in current-quarter gross margin, stoking worries about near-term demand.
US inflation posted its biggest increase in three years, while consumer sentiment hit a record low in May, forcing households to tap savings and cut back on discretionary purchases such as clothes and accessories.
Both companies flagged weakness in certain women's seasonal categories, weighing on current-quarter results.
At Gap, which is undergoing a turnaround under CEO Richard Dickson, pressure centered on Old Navy, its largest banner, where seasonal women's apparel failed to connect with shoppers.
"Old Navy was the key swing factor," BTIG analysts said in a note.
"Weakness was concentrated in seasonal categories like dresses, where the assortment missed on fashion and value, weighing on conversion despite solid traffic."
American Eagle also came under pressure as strong demand at Aerie failed to offset weakness at its namesake brand, with women's bottoms hurt by changing fashion trends and a colder spring.
In a bid to attract Gen Z shoppers and boost sales, the denim retailer, last month, unveiled a second campaign with "Euphoria" star Sydney Sweeney for its summer season denim shorts collection, a year after a viral and controversial ad featuring the actress fueled a stock rally.
Barclays noted heavy marketing spending is expected to recur in Q2 2026, but "bottoms including denim have since returned to underperformance".
It added American Eagle brand may struggle to lap its high-profile Sydney Sweeney and Travis Kelce campaigns and drive earnings growth in H2 2026.
Gap currently trades at 10.30 times its estimated earnings for the next 12 months, compared with 9.70 times for American Eagle and 7.43 times for Abercrombie & Fitch, according to LSEG data.
