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Gap’s Profitability Improves Further in 4Q17

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Gap beats Wall Street expectations in all quarters of 2017

Gap (GPS), which reported its 4Q17 results on March 1, posted a 19.6% YoY (year-over-year) jump in its adjusted diluted EPS (earnings per share) to $0.61. The company surpassed Wall Street’s expectation of a 13.7% YoY rise to $0.58.

The apparel retailer beat expectations in all quarters of the fiscal year. In fiscal 2017, its EPS rose 5.4% YoY to $2.13, surpassing the upper end of its $2.08–$2.12 guidance range and improving from the last two fiscal years, when the company reported a 14% and 17% decline in EPS.

Gross margin continues to improve in 4Q17

As discussed in the previous section, Gap has recorded positive same-store sales in the last five quarters. The company’s top-line strength has been accompanied by improving margins.

Gap’s 4Q17 gross margin improved by 310 basis points to 36.8%, marking the sixth straight quarter of margin growth. The company benefited by 130 basis points from rent and occupancy leverage and 180 basis points from merchandise margin expansion.

“The fourth quarter marked our fifth consecutive quarter of positive comp sales and our sixth consecutive quarter of gross margin expansion. This was a very strong holiday period for us, particularly considering, it’s against our most difficult comp comparisons for the year,” said GAP chief financial officer Teri L. List-Stoll during the company’s 4Q17 earnings call.

In fiscal 2017, Gap’s gross margin improved by 200 basis points to 38.3% of sales, driven by a 120-basis-point increase in its merchandise margin and an 80-basis-point increase in rent and occupancy leverage.

How Gap’s margins compare

While Gap’s margins have continuously improved, the company still lags behind peers in terms of profitability. Its trailing-12-month gross margin of 38.3% is narrower than Ralph Lauren’s (RL), PVH’s (PVH), and VF’s (VFC) margins of 59%, 54.7%, and 50.4%, respectively. Investors seeking exposure to Gap could consider the PowerShares High Yield Equity Dividend Achievers Portfolio ETF (PEY), which invests 1.7% of its holdings in Gap.

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