By Savyata Mishra

(Reuters) - Gap shares fell 20% in early trading on Friday after the Old Navy owner warned that U.S. tariffs would squeeze this year's profit, even as the apparel maker aims to soften the blow by diversifying its supply chain and investing in U.S. cotton.

The company reaffirmed its annual forecasts that did not include tariff-related costs but flagged expenses of up to $300 million, which analysts said would weigh on Gap's margins through the second half of the year and into 2026.

Shares of the company, which owns brands such as Banana Republic and ON, were trading at $22.44. The stock has surged 30% so far this month, as investors focused on the firm's efforts to improve product innovation and store operations.

At least three brokerages trimmed price targets on the stock, with Jefferies cutting it by the most, to $26 from $29.

"Banana Republic and Athleta likely need much reinvestment to drive consistent positive comparable sales and margin expansion, in our view," UBS analyst Jay Sole said.

President Donald Trump's trade policy has threatened to upend supply chains and push up prices for everyday essentials.

Some retailers including Best Buy have accounted for the tariffs and a few others have pulled their forecasts. However, firms like Gap have excluded the impact from their outlook, citing an ever evolving trade policy.

Under the leadership of Richard Dickson, who took helm in 2023, Gap laid out plans to double the use of America-grown cotton by 2026, with executives on a post-earnings call saying that investing in the U.S., its biggest market, remains a key priority.

It has been diversifying its supplier footprint for several years, and currently has a less than 10% exposure to China. The region was one of its top manufacturing hubs, followed by Vietnam and Indonesia. It aims for no country to account for more than 25% by the end of 2026.

The company topped Wall Street estimates first-quarter sales and profit helped by full-price selling in its namesake and Old Navy brands.

Gap's forward price-to-earnings multiple (P/E), a common benchmark for valuing stocks, is 11.69, compared to a P/E ratio of 7.99 for Abercrombie & Fitch and 10.02 for American Eagle Outfitters, according to LSEG.