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Why JCPenney’s Margins Might Continue to Be under Pressure

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Oct. 15 2018, Updated 11:10 a.m. ET

Impact of challenging environment

A challenging retail environment forced JCPenney (JCP) to book markdowns in the second quarter, causing a contraction in the company’s gross margin during the quarter. JCPenney’s gross margin fell significantly to 33.7% in the second quarter of fiscal 2018 from 35.3% in the second quarter of fiscal 2017. Markdowns and pricing actions taken by JCPenney to clear slow-moving inventory pulled down the second-quarter gross margin.

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JCPenney’s operating margin contracted to -1.3% in the second quarter of fiscal 2018 compared to 1.8% in the second quarter of fiscal 2017. A lower gross margin and the deleveraging of selling, general, and administrative expenses as a percentage of net sales pulled down the operating margin in the second quarter.

Overall, the company’s gross margin fell 200 basis points to 33.7% in the first half of fiscal 2018. The company’s operating margin declined to -0.6% in the first half of fiscal 2018 compared to 0.8% in the first half of fiscal 2017.

Efforts to improve margins

JCPenney has been trying to improve its profitability by closing down unprofitable stores and by streamlining its operations. JCPenney is also focusing on improving its sales in high-margin categories like women’s apparel and fine jewelry.

However, JCPenney’s fiscal third quarter gross margin might decline due to additional markdowns to adjust inventory levels. The margins of several retail stocks have also been under pressure because of rising freight costs.

Let’s look at earnings expectations from JCPenney in the next part of this series.

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