Executive Briefings

U.S. Department Stores Steady Profitability by Cutting Supply Chain Costs

U.S. department store chains, hit by slowing sales for more than two years, have used layoffs, store closings and cutbacks to maintain one aspect of stability: profit margins.

U.S. Department Stores Steady Profitability by Cutting Supply Chain Costs

An analysis of two important indicators of retail profitability, gross margins and operating margins, shows retailers like Kohl's Corp, JC Penney Co Inc, Macy's Inc and Target Corp have done a better job at delivering on profitability than maintaining sales growth.

This has given some investors hope for a recovery in a sector battered by the rise of online shopping led by Amazon.com Inc, and competition from off-price chains like TJX Cos and fast fashion retailers like Inditex's Zara.

"Margins have been relatively better compared to sales and they are finally taking important steps like closing unprofitable stores," said Charles Sizemore, founder of Sizemore Capital Management LLC, who owns shares of Wal-Mart Stores Inc and other retailers. "The story right now is bad but we do expect some of these problems to bottom out over time."

Gross margins at all four chains have remained steady over the past four years, helped by cost cutting initiatives like store closures. Operating margins have shown recent improvement at some chains like Kohl's and Target, steadily improved for JC Penney, but contracted for others like Macy's.

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An analysis of two important indicators of retail profitability, gross margins and operating margins, shows retailers like Kohl's Corp, JC Penney Co Inc, Macy's Inc and Target Corp have done a better job at delivering on profitability than maintaining sales growth.

This has given some investors hope for a recovery in a sector battered by the rise of online shopping led by Amazon.com Inc, and competition from off-price chains like TJX Cos and fast fashion retailers like Inditex's Zara.

"Margins have been relatively better compared to sales and they are finally taking important steps like closing unprofitable stores," said Charles Sizemore, founder of Sizemore Capital Management LLC, who owns shares of Wal-Mart Stores Inc and other retailers. "The story right now is bad but we do expect some of these problems to bottom out over time."

Gross margins at all four chains have remained steady over the past four years, helped by cost cutting initiatives like store closures. Operating margins have shown recent improvement at some chains like Kohl's and Target, steadily improved for JC Penney, but contracted for others like Macy's.

Read Full Article

U.S. Department Stores Steady Profitability by Cutting Supply Chain Costs