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Gap’s Management Raised Its Fiscal 2017 Guidance

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EPS beat analysts’ expectations

Gap (GPS) reported its 2Q17 results on August 17. The company reported adjusted diluted EPS (earnings per share) of $0.58 and topped Wall Street analysts’ estimates by $0.06. However, its earnings fell 3.3% YoY (year-over-year) during the quarter. Currency headwinds had a negative impact on its 2Q17 EPS of ~$0.02.

“Below the top line, we’ve demonstrated our ability to expand margins and we will continue to be aggressive and disciplined cost managers,” said Art Peck, Gap’s president and CEO.

Encouraged by the company’s second quarter results, Gap’s management increased its fiscal outlook. The company expects its EPS to be $2.02–$2.10—compared to $1.95–$2.05 guided earlier.

“Based on the strength of the first half, we are pleased to increase our full year earnings guidance,” added Peck.

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Operating margin fell

Gap reported gross margin expansion for the fourth consecutive quarter. The gross margin was 38.9%—compared to 37.3% in the same quarter last year. The improvement was driven by positive average unit retail at Gap and Old Navy as well as lower rent and occupancy expenses.

However, Gap’s operating margin fell by 90 basis points to 10.2% of sales, mainly due to an increase in SG&A expenses—up by $70 million. Higher payroll costs and a rise in investments in digital and customer initiatives led to a rise in SG&A expenses during the quarter.

Investors wanting to get exposure to Gap through ETFs can consider the PowerShares the SPDR S&P Retail ETF (XRT). XRT invests 1.2% of its holdings in Gap.

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