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This Took a Toll on Gap’s 4Q16 Margins

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Gap’s 4Q16 earnings plunge

Gap (GPS) released its results on February 23, 2017, reporting a fall in adjusted diluted EPS (earnings per share) of 11% YoY (year-over-year) to $0.51 in 4Q16. This was in line with the Wall Street estimates. Notably, the company’s earnings per share have registered a YoY (year-over-year) fall in every quarter since the end of fiscal 2014.

For fiscal 2016, Gap’s EPS plunged 17% to $2.02 and landed at the upper end of the management’s guidance of $2.01–$2.02 for the year. 

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Operating margin, operating expenses

Gap’s 4Q16 gross margin improved 110 basis points to 33.9% as the company benefitted 60 basis points from rents and occupancy leverage and 50 basis points from merchandise margin expansion. For fiscal 2016, the company’s gross margin improved ten basis points to 36.3%.

Gap’s operating margin, however, fell 150 basis points to 7.2% in 4Q16 on account of a 10% jump in operating expenses. For fiscal 2016, the company’s operating margin was down 160 basis points to 8.9% of sales.

On a GAAP (generally accepted accounting principles) basis, operating margin stood at 7.7% for the year, which was lower than most apparel players. PVH Corporation (PVH), VF Corporation (VFC), and Hanesbrands (HBI), for instance, have delivered operating margins of 10%, 12.1%, and 12.7%, respectively, over the last-12-month period. Ralph Lauren (RL), however, has TTM margin of around 3%.

Fiscal 2017 guidance

Gap’s management expects its fiscal 2017 diluted earnings per share to wind up in the $1.95–$2.05 range. At the midpoint, this would imply a decline of 1% in earnings.

Notably, investors interested in exposure to Gap through ETFs might consider the SPDR S&P Retail ETF (XRT), which invests 1.3% of its holdings in Gap.

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