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How Macy’s Productivity Measures Aim to Improve Operating Margins

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Mar. 20 2015, Updated 4:05 a.m. ET

Pressure on margins

Macy’s (M) has been implementing productivity measures to improve its margins in order to offset the impact of stagnant sales amid intense competition from off-price and outlet retailers as well as online competitors. Macy’s is a part of the SPDR S&P 500 ETF (SPY), which has 12.6% holdings in the consumer discretionary sector.

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Fiscal 2014 margins

Macy’s gross margin contracted slightly to 40.0% in fiscal 2014, from 40.1% last year. The lower gross margin was a result of a decline in merchandise margin and higher delivery expense, which were partially offset by an increase in license income. The company’s operating margins improved to 9.96% in fiscal 2014, from 9.59% last year. Macy’s operating income increased by 4.6% to $2.8 billion. In fiscal 2014, Macy’s recorded $87 million of expenses and asset impairment charges related to its restructuring initiatives and store closures. This compares to $88 million of similar charges recorded in fiscal 2013.

Macy’s margins are higher than peers

Macy’s gross margins have been at or above 40% in the past five years. Peers Nordstrom (JWN), Dillard’s (DDS), and Kohl’s Corporation (KSS) have gross margins of 37.8%, 37.0%, and 36.4%, respectively. These companies are part of the SPDR S&P Retail ETF (XRT).

Macy’s operating margin is also higher than its department store peers. However, Macy’s operating margin is lower than off-price retailers like TJX Companies (TJX) and Ross Stores (ROST), which registered operating margins of 12.4% and 13.5% in their most recent fiscal years, respectively. TJX and Ross have lean business models and turn their inventory quite quickly by providing attractive merchandise at deep discounts to customers.

Productivity initiatives

In January 2015, Macy’s announced a series of initiatives to restructure its merchandising and marketing functions, as well as certain store and field adjustments. These initiatives are expected to generate annual savings of $150 million, starting in 2015. Macy’s plans to reinvest these savings into technology and growth initiatives, and to offset the expected increase in health care and retirement plans.

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