Gross margin contraction
In fiscal 2015 ended January 30, 2016, Nordstrom’s gross margin declined to 36.5% from 37.8% in fiscal 2014. This was a result of higher markdowns taken in response to an elevated promotional environment during the second half of fiscal 2015. In 4Q15, Nordstrom’s gross margin declined to 35.6% from 38.3% in 4Q14 due to higher markdowns.
Declining operating margins
Nordstrom’s operating margin in fiscal 2015 decreased to 7.6% from 9.8% in the previous fiscal year. This resulted from the company’s growth initiatives related to the following:
- Trunk Club acquisition
- new stores in Canada
- asset impairment charges
- higher fulfillment costs to support online growth
Peers Macy’s (M), Kohl’s (KSS), and JCPenney (JCP) reported operating margins of 7.5%, 8.1%, and -0.7%, respectively, in fiscal 2015. Nordstrom and Macy’s together account for 5.2% of the iShares Russell Mid-Cap Growth ETF (IWP).
Nordstrom’s operating margin in 4Q15 declined to 7.7% from 11.5% in 4Q14 due to higher selling, general, and administrative expenses. It included impairment charges of $50 million associated with the company’s full-line store in San Juan, Puerto Rico, and other retail and technology assets.
In April 2016, Nordstrom announced certain operating model improvements, including phased elimination of about 350–400 positions. The reduction of these positions, primarily in the company’s corporate center and regional support teams, is expected to generate savings of approximately $60 million in fiscal 2016.
Nordstrom is also implementing a new operating model in its Technology group. This new model will focus on strengthening the company’s e-commerce and digital initiatives. It will also help improve supply chain and marketing effectiveness. As for its online business, the company is looking for ways to generate lower shipping costs. It’s also refining its online merchandise assortments with a focus on unit profitability.
In the next part of this series, we’ll look at expectations for the company’s 1Q16 earnings.