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Why Macy’s Margins Might Be under Pressure in Fiscal 1Q16

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Declining gross margin

Macy’s (M) gross margin in 4Q15, which ended January 30, 2016, declined by 290 basis points to 37.4% on a year-over-year basis. Weak holiday sales and higher markdowns amid a heavy promotional environment impacted Macy’s gross margin in 4Q15. For fiscal 2015, Macy’s gross margin declined by 90 basis points to 39.1% due to higher markdowns and the costs associated with continued growth of its omnichannel businesses.

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In the 4Q15 conference call, Karen M. Hoguet, Macy’s chief financial officer, said the company expects gross margin contraction in 1Q16 and 3Q16. The expected decline in gross margins in 1Q16 might be caused by the continued impact of a dismal 4Q15. The gross margin decline in 3Q16 is expected to be due to an unfavorable comparison with strong margins in 3Q15.

Operating margin in the past quarter

Macy’s operating margin in fiscal 4Q15 declined to 10.6%, from 14.6% in fiscal 4Q14. The decline was caused by charges of $177 million associated with impairments, store closings, and other costs. These charges included the following:

Macy’s operating margin in fiscal 2015 declined to 7.5% from 10% in fiscal 2014. Macy’s constitutes 0.4% of the iShares US Consumer Services ETF (IYC). Macy’s peers Nordstrom (JWN), Kohl’s (KSS), and Dillard’s (DDS) reported operating margins of 7.6%, 8.1%, and 7%, respectively, in fiscal 2015.

Restructuring initiatives

Macy’s has been closing unprofitable stores and making organizational changes to enhance its profitability. The company’s cost-efficiency initiatives announced in January 2016 included consolidation of existing Macy’s stores into five regions and 47 local districts. That was lower than the previous seven regions and 58 local districts. In the 4Q15 conference call, the company said that aside from its planned restructuring efforts, it has taken other actions that will reduce expenses by approximately $400 million in fiscal 2016.

We’ll look at analysts’ expectations for the company’s 1Q16 earnings in the next part of this series.

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