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Analyzing JCPenney’s Margins in Fiscal 2Q17

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Dec. 4 2020, Updated 10:42 a.m. ET

Gross margin fell in 2Q17

JCPenney’s (JCP) gross margin fell by 200 basis points to 35.1% in fiscal 2Q17[1. Fiscal 2Q17 ended on July 29, 2017]—compared to 37.1% in fiscal 2Q16. Its gross margin fell because the cost of goods sold increased in the quarter due to inventory liquidation at 127 stores that JCPenney closed in fiscal 2Q17. The liquidation event caused the company’s fiscal 2Q17 gross margin to fall by 120 basis points. JCPenney doesn’t expect the liquidation to continue to impact its gross margin after 2Q17. Also, costs associated with the growing online and major appliance businesses had a negative impact on the company’s gross margin in fiscal 2Q17.

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Lower operating margin

JCPenney’s operating margin fell to 1.8% in fiscal 2Q17 from 2.6% in fiscal 2Q16. The improved SG&A (selling, general and administrative expenses), as a percentage of sales in fiscal 2Q17, were offset by higher restructuring expenses associated with closing stores. The company’s restructuring and management transition expenses increased to $23 million in fiscal 2Q17 from $9 million in fiscal 2Q16.

The company’s SG&A expenses, as a percentage of sales, fell to 28.4% in fiscal 2Q17—compared to 29.2% in fiscal 2Q16. The improvement was driven by lower store controllable costs, corporate overhead, and higher private label credit card income.

Peers’ operating margin

Nordstrom’s (JWN) operating margin fell to 4.8% in fiscal 2Q17 from 5.7% in fiscal 2Q16. JCPenney’s lower operating margin was due to higher technology and supply chain expenses to support its growth initiatives. Kohl’s (KSS) operating margin expanded to 9.8% in fiscal 2Q17 from 7.2% in fiscal 2Q16 due to cost efficiencies.

JCPenney expects its gross margin to fall by 30 basis points to 50 basis points in fiscal 2017. Higher costs associated with JCPenney’s growing online sales and appliance business might drag down its gross margin. JCPenney expects its productivity initiatives to have a positive impact on its gross margin. The initiatives involve pricing analytics, modernizing merchandising systems, and improving the profitability of the company’s private brands.

In the next part, we’ll discuss analysts’ recommendations for JCPenney stock.

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