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What’s Behind Gap’s Improving Margins?

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Gap’s margins are showing continuous improvement

As we saw in the previous part of this series, Gap (GPS) has been recovering from a recent slowdown. The company has not only shown growth in sales comps (comparables), but its margins have also expanded continuously. In fact, the fashion retailer’s gross margin has increased for the last five quarters.

The company witnessed an improvement of 150 basis points in its gross margin for the first nine months of 2017 compared to the prior year’s period. Most of the increase has been driven by its cost-cutting initiatives, its change in pricing strategy, and the disposal of its non-profitable businesses.

Gap will likely witness another quarter of margin expansion in 4Q17. Wall Street has projected an improvement of 130 basis points in the company’s gross margin during 4Q17.

Comparing Gap’s margin to its peers

While Gap’s profitability has improved in the recent past, the company still has a lower margin than most of its peers. It recorded a trailing 12-month gross margin of 37.6% compared to 59%, 54.7%, and 50.4% for Ralph Lauren (RL), PVH (PVH), and VF Corporation (VFC), respectively.

Looking forward

For the fourth quarter of 2017, Wall Street has projected a 13.7% increase in Gap’s EPS (earnings per share) to $0.58. Gap has not missed consensus expectations for the last ten quarters.

For fiscal 2017, Gap’s management has projected EPS of $2.08–$2.12. At the midpoint, that reflects a 4% year-over-year increase in earnings. Wall Street is in line with management and has projected EPS of $2.10. It’s worth noting that Gap’s EPS declined 14% and 17% in fiscal 2015 and fiscal 2016, respectively.

Next, let’s see how Gap stock has been performing.

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