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Through the Earnings Mirror: JCPenney’s Mixed Fiscal 4Q16 Results

PART:
1 2 3 4 5
Part 3
Through the Earnings Mirror: JCPenney’s Mixed Fiscal 4Q16 Results PART 3 OF 5

How JCPenney Delivered Higher Operating Margins in Fiscal 4Q16

Margins in 4Q16

In an effort to mitigate the impact of an uncertain retail environment, JCPenney (JCP) has been implementing several measures to bring down its costs and improve its margins.

In fiscal 4Q16, which ended on January 28, 2017, JCPenney’s gross margin fell on a year-over-year basis, but its operating margin expanded. JCPenney’s 4Q16 gross margin fell 100 basis points to 33.1%. This decline was mainly due to increased couponing and higher promotional activity.

How JCPenney Delivered Higher Operating Margins in Fiscal 4Q16

How JCPenney Delivered Higher Operating Margins in Fiscal 4Q16

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The company’s fiscal 4Q16 gross margin was also adversely impacted by costs associated with higher online sales and its Home Appliance business. For fiscal 2016, JCPenney’s gross margin fell 30 basis points to 35.7%.

Operating margin expansion

JCPenney’s operating margin improved significantly to 6.9% in fiscal 4Q16 from -0.5% in fiscal 4Q15. This improvement came in as selling, general, and administrative (SG&A) expenses fell 70 basis points as a percentage of sales. The savings in SG&A expenses mainly resulted from lower incentive compensation and store-controllable costs.

For fiscal 2016, JCPenney’s operating margin increased to 3.1% compared to -0.7% in fiscal 2015.

Rival Macy’s (M) reported an operating margin of 9.6% in fiscal 4Q16 compared to 10.6% in fiscal 4Q15. This contraction in Macy’s operating margin was due to higher impairments, store closings, and other costs. JCPenney and Macy’s together constitute 1.8% of the SPDR S&P Retail ETF (XRT).

Margin outlook

JCPenney (JCP) expects its fiscal 2017 gross margin to rise 20–40 basis points compared to fiscal 2016. The company’s operating margin could improve as SG&A expenses are expected to fall ~1.0%–2.0% compared to fiscal 2016.

The retailer aims to improve its gross margin through several initiatives, including adopting a more controlled approach to couponing and regional pricing initiatives, reducing shortages, modernizing its replenishment process, and other supply chain initiatives. The company’s higher-margin private brands are also a key focus area for margin enhancement.

In the fiscal 4Q16 conference call, JCPenney’s chief financial officer, Edward J. Record, stated that the company aims to enhance the profitability of its private brands through design, sourcing, and speed-to-market initiatives.

We’ll look at the company’s initiatives to improve its sales in the next part of this series.

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