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JCPenney's Fallout Survival: After the Fiscal 1Q17 Results

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Part 4
JCPenney's Fallout Survival: After the Fiscal 1Q17 Results PART 4 OF 5

Why JCPenney’s Operating Margin Declined in Fiscal 1Q17

Improved gross margin

In fiscal 1Q17 (ended April 29), JCPenney (JCP) was able to deliver an improved gross margin despite the 3.7% decline in its sales. JCPenney’s gross margin rose 10 basis points to 36.3% during the quarter.

The expansion in JCP’s fiscal 1Q17 gross margin was a result of improved selling margins. However, expenses to support the growth in the company’s online business and the 500 appliance showrooms adversely impacted the 1Q17 gross margin.

Why JCPenney’s Operating Margin Declined in Fiscal 1Q17

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Operating margin in 1Q17

JCPenney’s operating margin was -3.9% in fiscal 1Q17, as compared to 0.8% in fiscal 1Q16. The company’s operating margin fell due to $220 million in restructuring charges associated with the company’s store closing decision and its voluntary early retirement program. The deleveraging of selling, general, and administrative expenses on lower sales also adversely impacted the company’s operating margin.

By comparison, rival Kohl’s (KSS) operating margin rose to 4.8% in fiscal 1Q17 from 2.7% in fiscal 1Q16. The company’s operating margin expansion was a result of a higher gross margin and expense management efforts.

Initiatives to improve margins

JCPenney is now taking several initiatives to improve its gross margin. These initiatives include pricing analytics, modernizing the replenishment processes and systems, and improving the profitability of the company’s private brands. In the company’s 1Q17 conference call, JCPenney CFO (chief financial officer) Edward J. Record disclosed the recent sale and future relocation of the company’s Buena Park supply chain facility as part of its efforts to optimize its supply chain network.

The company expects its gross margin to increase by 20–40 basis points in fiscal 2017.

In the next and final part, we’ll look at JCPenney’s valuation.

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