Bridging the gap between Gross and Operating margins
In this post, we’ll explore why some companies, despite having a low cost of goods sold (COGS) relative to their sales , see a significant gap between their gross margin and operating margin due to high operating expenses (OpEx) . Operating expenses, typically include costs like salaries, rent, depreciation, marketing, distribution and administrative expenses. To illustrate, we’ll look at two companies: Prada - A luxury fashion brand Lululemon Athletica – A designer, distributor, and retailer of technical athletic apparel, footwear, and accessories. As a starting point, we took the most recent three years of annual data for both companies. We created a common-size analysis focused on three key performance indicators: revenue, gross margin, and operating margin as shown in the table below. Source: Annual Reports, Our Calculation From this analysis, we observed a significant gap between gross margin and operating margin for both companies. For example, as shown in the table, Lululem...