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Can Macy’s and Nordstrom Improve Margins amid Cost Pressures?

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Comparison of margins

In the first nine months of fiscal 2018, which ended on November 3, 2018, Macy’s (M) delivered a higher gross margin than Nordstrom (JWN) did. However, Nordstrom’s operating margin was better than Macy’s in this period. Macy’s gross margin improved to about 39.9% in the first nine months of fiscal 2018 compared to 39.4% in the first nine months of fiscal 2017. This expansion in the gross margin was driven by efficient inventory management, which led to lower markdowns.

Nordstrom’s gross margin decreased about 19 basis points to 34.1% in the first nine months of fiscal 2018 due to the impact of an unfavorable mix because of higher off-price growth. The company’s off-price business carries a lower margin than the full-price business.

Macy’s operating margin expanded to 4.2% in the first nine months of fiscal 2018 compared to 3.8% in the first nine months of fiscal 2017. Macy’s operating margin benefitted from higher gross margin, partially offset by lower gains on the sale of assets.

Nordstrom’s operating margin declined about 100 basis points to 4.5% in the first nine months of fiscal 2018. This decline was mainly caused by a non-recurring charge of $72 million resulting from delinquent Nordstrom credit card accounts being erroneously charged a higher interest rate.

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Margin expectations

Intense competition in the retail market is causing many retailers to take higher markdowns to clear their inventory. Also, higher freight costs and wages are expected to be roadblocks to margin improvement. Both Macy’s and Nordstrom are focusing on better inventory management and driving efficiencies in their operations to improve productivity.

However, expenses to support rising e-commerce sales and investments in growth initiatives are expected to put pressure on the margins of these department stores.

Let’s look at analysts’ recommendations for Macy’s stock next.

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