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Macy’s Fiscal 4Q15 Margins Fall in Heavy Promotional Environment

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Gross margin in fiscal 4Q15

In Macy’s fiscal 4Q15, which ended January 30, 2016, the company’s gross margin declined to 37.4% from 40.3% in fiscal 4Q14. Weak holiday sales and higher markdowns caused the drop in Macy’s gross margin.

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Higher markdowns

Moderate consumer spending, unfavorable warm weather, and intense competition from online retailers like Amazon (AMZN) and off-price retailers like TJX Companies (TJX) have been impacting the sales and margins of department stores.

In the fiscal 4Q15 conference call, Karen M. Hoguet, Macy’s chief financial officer, stated that the company took additional markdowns in the fourth quarter so that it could start fiscal 2016 with the right inventory level. Macy’s took markdowns in 4Q15 to ensure that it cleared seasonal goods and priced the remaining inventory properly for the February and March selling period. Macy’s inventory at the end of fiscal 2015 increased by 1.6%.

Overall, Macy’s gross margin in fiscal 2015 declined by 90 basis points to 39.1% compared to fiscal 2014. The iShares U.S. Consumer Services ETF (IYC) has 0.5% exposure to Macy’s.

Peers also impacted by markdowns

The gross margins of peers Nordstrom (JWN) and Dillard’s (DDS) also declined with higher markdowns in fiscal 4Q15. Nordstrom’s fiscal 4Q15 gross margin declined to 35.6% compared to 38.3% in fiscal 4Q14. Dillard’s gross margin declined to 31.2% in fiscal 4Q15 from 34.3% in fiscal 4Q14. In an update provided on February 4, Kohl’s (KSS) stated that its fiscal 4Q15 gross margin was affected by the origin and timing of sales and a competitive promotional environment, which resulted in higher-than-expected markdowns.

Macy’s operating margin in fiscal 4Q15

Macy’s operating margin in fiscal 4Q15 declined to 10.6% from 14.6% in fiscal 4Q15. The 4Q15 operating margin was impacted by charges of $177 million associated with impairments, store closings, and other costs. These charges included $37 million of asset impairment charges related to planned store closures and $123 million of severance and other human resources–related costs associated with organizational changes and store closings announced in January 2016.

We’ll discuss Macy’s earnings in the next part of this series.

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