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Is JCPenney Poised to Deliver Better Fiscal 2Q17 Results?

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Part 2
Is JCPenney Poised to Deliver Better Fiscal 2Q17 Results? PART 2 OF 4

Why JCPenney’s Fiscal 2Q17 Margins Might Contract

Margins under pressure

JCPenney’s (JCP) investments to support its growing online business and the costs associated with the expansion of its appliance business are adversely impacting its margins. In fiscal 1Q17, which ended on April 29, 2017, JCPenney was able to deliver a higher gross margin. However, the company’s operating margin has declined on a year-over-year basis.

Why JCPenney’s Fiscal 2Q17 Margins Might Contract

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Margins in the previous quarter

JCPenney’s gross margin expanded by 10 basis points on a year-over-year basis to 36.3% in fiscal 1Q17. This improvement was a result of improved selling margins in the first quarter, partially offset by the continued growth of the company’s Online and Major Appliance segments.

JCP’s operating margin fell to -3.9% in fiscal 1Q17 from 0.8% in fiscal 1Q16. This decline was due to charges of $220 million associated with the company’s store closing decision and its voluntary early retirement program. Also, the company’s selling, general, and administrative (or SG&A) expenses deleveraged on lower sales in fiscal 1Q17. These factors adversely impacted the company’s fiscal 1Q17 operating margin.

Why JCP’s fiscal 2Q17 margins could decline

In the company’s fiscal 1Q17 conference call, Edward J. Record, JCPenney’s former CFO, indicated there would be 80 basis points of pressure on its fiscal 2Q17 gross margins due to store closures. JCPenney previously announced its decision to close 138 underperforming stores.

However, the company’s productivity initiatives could favorably impact its fiscal 2Q17 and fiscal 2017 gross margins. The company believes its margins could benefit from its pricing analytics, efforts to modernize its replenishment processes and systems, and initiatives to improve the profitability of its private brands. The company is also optimizing its supply chain network.

The company expects its fiscal 2017 gross margin to expand 20–40 basis points compared to 35.7% in fiscal 2016.

We’ll discuss the analysts’ expectations for JCPenney’s fiscal 2Q17 earnings in the next part of this series.

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