Margins under pressure

In its 1Q16 conference call, Macy’s (M) chief financial officer Karen M. Hoguet indicated that the company’s gross margin could be impacted by the slowness in warm-weather goods sales in 2Q16.

The company expects its 2016 gross margin rate to remain flat compared to 2015. Despite lower sales, the company’s gross margin improved by 10 basis points to 39.1% in 1Q16.

What Factors Are Likely to Affect Macy’s Margins in 2Q16?

Previous quarter’s operating margin

Macy’s operating margin fell to 4.8% in 1Q16 from 6.6% in 1Q15, due to omni-channel–related expenses as well as expenses related to the expansion of the company’s Bluemercury business, Macy’s Backstage stores, and growth in China’s online market via a joint venture with Fung Retailing.

The company’s 1Q16 operating margin was also impacted by $13 million of non-cash settlement charges related to the company’s defined benefit retirement plans. The above-mentioned unfavorable factors offset the impact of the company’s restructuring efforts. Macy’s constitutes 1.1% of the SPDR S&P Retail ETF (XRT).

The operating margins of Macy’s peers Nordstrom (JWN), Kohl’s (KSS), and JCPenney (JCP) were 3.3%, 2.7%, and 0.8%, respectively, in 1Q16.

Productivity initiatives

Macy’s has been making efforts to improve its margins by closing unprofitable stores and streamlining its operations. In January 2016, Macy’s announced a series of cost reductions and process improvement measures. These initiatives included combining certain region and district organizations of the My Macy’s store management structure, adjusting staffing levels, offering a voluntary separation opportunity for certain senior executives, and bringing down additional positions in back-office organizations.

The company also consolidated its four credit and customer service center facilities into three and decreased non-payroll budgets. During January 2016, Macy’s also announced the closure of 40 Macy’s stores.

In the next part of this series, we’ll discuss Macy’s 2Q16 earnings expectations.

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