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Retailers report struggles, is Gap next?

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One after the other, retailers have confessed that it’s been a tough quarter. Gap is the next in focus as it prepares to release its earnings after the bell.

Amid a turnaround, including management changes, Gap has reported rising sales year over year.

The question though is gross margins. Jamie Katz, analyst at Morningstar, said: “Merchandise margins can be significantly impacted if they have to reduce prices to move those units through the door.” Katz expects 40.6 percent, which is 70 basis points higher than the 39.9 percent in the prior year period.

The concern, according to Katz, is if back-to-school sales look spotty, as it does for so many teen retailers, the outlook for the holiday season can also be dismal.

Katz warns investors the stock is trading a little above fair value. She said, going forward this multiple can contract. “Gap may begin growing at a more normalized rate and that multiple can pull back a little bit,” said Katz.

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