Gap Inc. (GAP) shares plummeted 18.12% in pre-market trading on Friday, following the company's warning about the significant impact of tariffs on its fiscal 2025 financials. Despite reporting better-than-expected first-quarter results, investors focused on the potential hit to the retailer's bottom line from increased import costs.

In its earnings report, Gap cautioned that tariffs could lead to incremental costs of $250 million to $300 million in fiscal 2025. Even after mitigation efforts, the company expects a net impact of $100 million to $150 million on its operating income, primarily weighted towards the second half of the year. This revelation overshadowed Gap's solid Q1 performance, which saw earnings per share of $0.51, surpassing analyst estimates of $0.45, and revenue of $3.46 billion, slightly above the expected $3.42 billion.

The tariff concerns come at a time when Gap is working to transform its business and improve performance across its brands. While the company maintained its previous outlook for full-year sales growth of 1% to 2%, the added cost pressures from tariffs have rattled investors. Gap's CEO Richard Dickson emphasized the company's efforts to diversify its sourcing, with plans to reduce reliance on Chinese imports to less than 3% by the end of 2025. However, the immediate financial impact and uncertain trade environment have led to a significant sell-off in Gap's stock.