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Total Expenses were $15.6 Billion, with Cost of sales of $10.3 billion, and $5 Billion in Operating Expenses
Breakdown of Gap's Total Expenses (2018):
Total: $15.6 Bil
Cost of Sales $10.3 Bil (66%)
Operating Expenses $5.0 Bil (32%)
Income tax expense $0.3 Bil (2%)
Gap's Total Expenses Have Increased From $14.9 Billion in 2015 to $15.6 Billion in 2018
% change in Total expenses
Gap’s total expenses have increased by 4.7% since 2015, going up from $14.9 billion to $15.6 billion in 2018 and are expected to remain flat in 2019. Operating expenses have been the largest contributor to this increase, with the operating expenses increasing from $4.2 billion in 2015 to nearly $5 billion in 2018.The company’s total expenses in absolute terms are expected to remain stable in 2019 as an increase in operating expenses is likely to be offset by an expected decrease in the cost of sales likely to be driven by a 2.2% decrease in Gap’s revenues for 2019.Additionally, the company’s total expenses as % revenue are projected to increase by 200 basis points, from 94% in 2018 to 96% in 2019.
1. Cost of Sales & Occupancy Expenses:
Cost of Sales have increased from $10.1 Bil in 2015 to $10.3 Bil in 2018 mainly due to steady revenue growth. As revenues have grown at a faster rate than the cost of sales, the Gross Profit Margin has expanded from 36.2% to over 38.1% over the same period
Cost of Sales & Occupancy expense
The cost of sales includes the expenses incurred to acquire and produce inventory for sale, including product costs, freight-in, and rent & occupancy costs. COGS is the largest expense driver, accounting for nearly two-thirds of the company’s total expenses in 2018.COGS have increased by just 1.8% over the last few years, increasing from $10 billion in 2015 to $10.3 billion in 2018 driven by primarily as a result of higher revenues.Higher revenues coupled with stable COGS has helped Gap’s gross margin expand by 190 basis points over the same time period. Moreover, higher margins achieved as a result of the improved average selling price per unit, coupled with lower occupancy costs have also aided in the gross margin expansion.We expect COGS to marginally decline in 2019, representing a gross margin figure of 37.1%. This decline in gross margin can be attributed to merchandise margin decline at Old Navy, as well as occupancy leverage due to lower revenues.
2. Operating Expenses :
Gap’s operating expenses include selling, general and administrative expenses, payroll and other costs. Operating expenses have increased from $4.2 Bil in 2015 to $5 Bil in 2018. Operating expense as % of revenue has increased from 26.6% in 2015 to nearly 30% in 2018
Operating expenses as % of total revenue
Gap’s operating expenses include selling, general and administrative expenses, payroll and other costs. Operating expenses have increased by 18% since 2015, increasing from $4.2 billion to $5 billion in 2018.Additionally, operating expenses as % of revenues are also on the rise, increasing from 26.6% in 2015 to nearly 30% in 2018 led by the additional costs associated with the presentation changes resulting from the adoption of new revenue recognition standard, partially offset by lower payroll and related costs.We expect total operating expenses to increase by 2.7% to just shy of $5.1 billion in 2019, representing 31.4% of total revenues of $16.2 billion.
3. Non-Operating Expense (Income) :
Gap's Non-Operating Expenses Have decreased From $53 million in 2015 to $40 million in 2018 mainly due to higher interest income, partially offset by higher interest expense
Total Non-operating Expenses(income)
Interest Income As % Cash & Cash Equivalents
Interest Expense Rate As % Debt
4. Income Tax Expense:
Gap's Income Tax Expense has fluctuated over the last few years, from $576 million in 2017 to around $319 million in 2018. This figure was unusually low in 2018 due to the enactment of the US Tax Reform
Effective tax rate
The company's effective tax rate has been highly volatile, ranging from 40.4% in 2017 to around 24.1% in 2018. The company’s effective tax steeply declined in 2018 due to the reduction in the U.S. federal statutory tax rate from 35% to 21%, enacted as a part of the US Tax reform.The effective tax rate is expected to be around 26% in 2019.