Signs of Progress at Undervalued Gap

Although narrow-moat

That said, we anticipate a few near-term headwinds that will somewhat mask progress in 2016 and provide clarity to guidance of earnings per share of $2.20-$2.25, versus our estimate of $2.37 and 2015’s $2.43. First is the impact of foreign currency. Like other companies in the apparel space, the impact of currency appears to be worse in 2016 than 2015 because of hedging programs in the previous year. As a result, currency is expected to have a $120 million impact on operating income, or a $0.19 impact on earnings per share. Second, the company rightly minimized expenditures during the subpar product period of 2015. As the new and improved product hits the stores, both marketing and incentive comp will likely increase. In particular, we see marketing expense increases leading traffic recovery, and we now expect deleveraging as a result.

In the long run, however, we still think the company can achieve low-single-digit top-line growth and midteen margin levels through product improvement and a responsive supply chain. As such, we see little change to our $43 fair value estimate.

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