Gross margin rose in 3Q16
Nordstrom’s (JWN) gross margin, based on total revenue—including credit card revenue, rose to 36.2% in fiscal 3Q16 from 35.6% in fiscal 3Q15. The improvement in the 3Q16 gross margin was driven by efficient inventory management and leverage of buying and occupancy costs on higher retail sales.
Operating margin in fiscal 3Q16
Nordstrom’s operating margin fell to 1.6% in fiscal 3Q16 from 4.7% in fiscal 3Q15. The decline was primarily due to a goodwill impairment charge of $197 million related to the Trunk Club business. Excluding the goodwill impairment charge, the company’s adjusted operating margin improved to 7.1%. The improvement was a result of lower SG&A (selling, general and administrative) expenses as a percentage of sales. The reduction in SG&A expenses as a percentage of sales was due to a favorable comparison with fiscal 3Q15, which was impacted negatively by expenses related to the sale of the company’s credit card portfolio.
The adjusted operating margin in fiscal 3Q16 also benefited from expense leverage. It resulted from the shift in sales volume from the Anniversary Sale to fiscal 3Q16 and the company’s efforts to improve its operational efficiencies.
Macy’s (M) operating margin was 1.9% in 3Q16—compared to 4.4% in 3Q15. The fall in Macy’s 3Q16 operating margin primarily resulted from non-cash settlement charges of $62 million related to its retirement plans. Together, Nordstrom and Macy’s account for 2.7% of the SPDR S&P Retail ETF (XRT).
Nordstrom is taking several steps to improve its margins. In its fiscal 3Q16 conference call, Nordstrom’s CFO, Michael G. Koppel, spoke about the company’s initiatives related to the supply chain—including efforts to reduce the per unit cost. The company expects these efforts to deliver savings of ~$50 million in shipping and fulfillment costs in fiscal 2016. However, the favorable impact of these productivity initiatives is expected to be impacted negatively by the company’s growth investments.
In the next part of this series, we’ll discuss the company’s stock price movement.