What Affected Macy’s Margins in the First Quarter



What dragged on Macy’s gross margin?

Macy’s (M) gross margin contracted ~80 basis points to 38.2% in the first quarter of fiscal 2019, which ended on May 4. The company’s first quarter gross margin was adversely affected by higher delivery expenses. Its merchandise margin was flat in the first quarter. Its delivery expenses increased due to robust digital sales and its free shipping offer under its loyalty programs.

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Macy’s operating margin contracted

Macy’s operating margin contracted to ~3.7% in the first quarter of fiscal 2019 from 4.3% in the first quarter of fiscal 2018. The company’s operating margin was adversely affected by higher SG&A (selling, general, and administrative) expenses mainly associated with the expansion of its off-price Backstage store fleet and other growth initiatives.

Aside from online retailers, Macy’s and other department stores have been under pressure due to a rise in competition from off-price retailers such as TJX Companies (TJX) and Ross Stores (ROST). Macy’s is aggressively expanding into the off-price space with its Backstage stores. Macy’s added nine off-price Backstage locations within its Macy’s brand stores in the first quarter and plans to open the remaining Backstage locations of the planned 50 by the end of the third quarter of fiscal 2019.

Margin outlook

Macy’s gross margin is expected to contract this year. The company is undertaking several initiatives to improve its margins. It’s trying to enhance its productivity through supply chain efficiencies, better inventory management, and the reduction of the complexity of its upper-management structure.


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