What Drove Kohl’s Gross Margin Expansion in 2Q16?

Gross margin up

Kohl’s (KSS) managed to expand its gross margin in 2Q16 despite lower sales. The company’s gross margin rose by 53 basis points to 39.5% on a year-over-year basis. This improvement was driven by efficient inventory management, which helped generate savings in both promotional markdown and permanent clearance markdowns.

What Drove Kohl’s Gross Margin Expansion in 2Q16?

Operating margin declines 

Unlike Kohl’s gross margin, the operating margin in 2Q16 fell to 7.2% from 9.9% in 2Q15. This decline was mainly caused by $128 million of impairments, store closings, and other costs associated with the store closures and organizational realignment at the company’s corporate office.

Though selling, general, and administrative expenses fell in dollar terms in 2Q16, it rose by three basis points as a percentage of sales. This slightly dragged the 2Q16 operating margin. The company was unable to deleverage store payroll expenses as well as information technology and corporate expenses. Kohl’s constitutes 0.3% of the iShares U.S. Consumer Services ETF (IYC).

Margins of peers

Macy’s (M) operating margin fell to 2% in 2Q16 from 7.1% in 2Q15 due to charges of $249 million associated with asset impairment and other charges related to planned store closings. Nordstrom’s (JWN) operating margin fell to 6.1% in fiscal 2Q16 compared to 10.2% in fiscal 2Q15. This decline was primarily due to an unfavorable comparison with fiscal 2Q15, which included a $64 million benefit associated with the sale of the company’s credit card portfolio. JCPenney’s (JCP) operating margin expanded to 2.6% in 2Q16 from -1.3% in 2Q15 due to higher sales and cost control measures.

Kohl’s aims to improve its future margins through various productivity measures and efficient inventory management. We’ll discuss the company’s valuation in the concluding part of this series.