DuPont’s Effect on Gap Inc.

by Talia Lambarki, MBA

The DuPont method of analysis is a method of measuring company performance that originated from the DuPont Corporation in the early 1900s. The operating efficiency (as measured by profit margin), asset use (as measured by total asset turnover), and financial leverage (as measured by equity) are analyzed to determine their effect on ROE. If the ROE is considered too low, the DuPont analysis can be used to identify the areas of underperformance.

A DuPont analysis of the Gap reveals the factors that contributed to the high ROE of 30%. In fact, the company maintained superior returns during the years 2008 through 2010. The average standard ROE is in the range of 12% to 15%. Gap’s ROE increased from 22% in 2008, to 23% in 2009, to 30% in 2010 (for a three-year average of 25%). The upward trend and high ROE for the three years indicates superior performance, which should attract investors to fund company projects that will further increase profitability.

In contrast, Abercrombie & Fitch and American Eagle suffered below average returns (ROE of 8% and 11%, respectively for the years 2008 through 2010). The returns of both companies also decreased from 2008 to 2009. If the Gap can sustain its strong financial stance, and even grow stronger, it will continue to be a formidable market leader in the United States.