What to Expect from Department Stores after a Mixed Fiscal 3Q15
Pressure on margins
Department stores have been investing heavily in store expansions, enhancements of store assortment, and other growth initiatives, which are impacting their margins.
Profitability comparison
Macy’s (M) operating margin declined to 4.4% in fiscal 3Q15 from 6.8% in 3Q14, primarily due to asset impairment charges of $111 million related to the planned store closures. Even excluding the asset impairment charges, Macy’s operating margin declined due to its investments in digital growth, expansion of its Bluemercury beauty departments, investments in the off-price Macy’s Backstage stores, and its entry into the Chinese market.
Nordstrom (JWN) reported a decline in its gross margin and operating margin. Nordstrom’s 3Q15 operating margin declined to 4.7% from 8.3% in 3Q14 due to Trunk Club, the ongoing expansion in Canada, and the higher fulfillment costs related to the growth of its online business.
Kohl’s (KSS) operating margin in 3Q15 came in at 6.96%, as compared to 6.95% in 3Q14. The rise in the company’s merchandise margins was offset by higher shipping costs associated with the growing online business. Kohl’s selling, general, and administrative (or SG&A) expenses were flat in 3Q15, as the company was able to leverage expenses on higher same-store sales.
JCPenney’s (JCP) operating margin improved to -1.6% in 3Q15 from -2.0% in 3Q14, due to lower SG&A expenses driven by reductions in store controllable expenses, more efficient advertising, and higher revenue from its private label credit card. The company’s gross margin also improved in 3Q15 due to improvements in clearance margins and lower supply chain costs.
Dillard’s (DDS) operating margin declined to 5.8% in 3Q15 from 6.7% in 3Q14, as the company’s SG&A expenses increased as a percentage of sales. Dillard’s SG&A expenses in 3Q15 were impacted by higher payroll and insurance expenses, which were partially offset by lower advertising expenses. Dillard’s makes up 0.01% of the iShares Russell Mid-Cap Growth ETF (IWP).
We’ll look at the stock price movements of department stores in the next part of this series.
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