Earnings per share likely to fall 11% in Q4
As discussed, Gap’s (GPS) business has been under pressure during the last several quarters. The company’s sales have fallen for seven straight quarters, and so have its earnings. Earnings per share fell 43%, 6%, and 5% in the first three quarters of fiscal 2016, respectively. For the fourth quarter, Wall Street has forecasted an EPS drop of 11% to 51 cents a share, and the management’s guidance is in a range of $0.50 to $0.51.
For the full fiscal 2016, the company’s management is looking for adjusted earnings per share between $2.01 to $2.02. At the midpoint, this would imply a decline of 17%.
Gap’s margins remain intact
While the company is likely far from delivering a satisfactory performance, its cost-cutting initiatives, correct pricing strategy, and disposal of non-profitable businesses have helped Gap in maintaining healthy margins.
As a result, its operating margin improved from 6.5% in 1Q16 to above 11% in the following two quarters.
Comparing Gap’s margin to peers
Gap’s margins were better than these companies’ margins not long ago. In fiscal 2015, the company posted an operating margin of 13.3% as compared to 6.4%, 11.7%, and 10.3% for PVH, VFC, and HBI, respectively. Investors looking to invest in Gap through ETFs can choose to invest in the SPDR S&P Retail ETF (XRT), which invests 1.1% of its holdings in Gap.
In the next article, we’ll discuss Gap’s stock market performance.