Gross Margin Sets Macy's Apart From Its Peers

Investors love Macy's savvy management techniques as well as its ability to steal customers from competitors, but they are really cheering on Macy's thanks to this one key metric.

Jan 22, 2014 at 2:35PM

Retail is a tricky business, especially when it comes to making a profit. Retailers such as Macy's, (NYSE:M), J.C. Penney (NYSE:JCP), Dillard's (NYSE:DDS), and Nordstrom (NYSE:JWN) purchase goods for a certain price from distributors and then strategically price each item much higher in order to make a profit off of it when it sells. The tough part is selling an item for its listed price without having to do any large discounting.

Often times, sales and discounts are OK as long as consumers are purchasing more items as a result, causing sales revenue to climb higher and higher. So, why is gross margin so important to a business' ultimate success, and which retailer is doing the best at keeping its gross margin strong?

Importance of gross margin
Making a profit is extremely important with any company. Being able to sell goods or services at a higher price than what a company purchases those goods or services for is key to not only thriving but simply surviving. Furthermore, a high gross margin is important because it shows how successful a company was at making sales off the listed selling price along with affording the costs for all goods sold to the company for a particular period. The amount leftover is the gross profit, which is then used to pay for other company expenses such as general, selling, and administrative costs as well as paying company shareholders and in the end, wind up with a solid net income.

Companies operating within the retail industry have different gross margins based on several factors: marketing their products through store displays, listed selling price, sales volume, desired brands available, and quality of the items. With all of these factors in mind, which retailer has consistently posted the highest gross margin over the last three years?

Company Name

Gross Margin
FY 2012

Gross Margin
FY 2011

Gross Margin FY 2010

Dillard's

37.09%

36.82%

36.39%

J.C. Penney 

31.31%

36.03%

39.19%

Macy's,

40.27%

40.4%

40.71%

Nordstrom

38.82%

39.4%

39.21%

Macy's earns the gold star
Despite fierce competition from its peers, Macy's has consistently produced the best gross margin in the industry. Unlike the other three retailers, Macy's has kept its gross margin above 40% for the last three years, which means that once the company's costs of goods sold have been subtracted from its total revenue, Macy's ends up retaining about 40% of each sale's earnings.

What's surprising is that Nordstrom has a slightly lower gross margin than Macy's despite offering high-end brands as well as higher prices for those items. Dillard's gross margin has shown steady improvement over the past three years, which is a good sign, while J.C. Penney's gross margin has fallen dramatically, making it even harder for the company to pay off its many operating expenses and earn a net profit. So, what is it about Macy's that stimulates a consistently high gross margin?

Enhancing the shopping experience
For most consumers, Macy's is seen as "fairly priced," well-organized, and having a wide assortment of mid- to high-end brands for the average consumer whereas Nordstrom is labeled as expensive and high end. Both retailers, though, provide excellent, attentive customer service in order to give shoppers a more personalized shopping experience that they will never forget. So why does Macy's boast a higher gross profit margin?

The first reason that Macy's has a higher gross margin than, say, J.C. Penney is because of its large selection of private labels. J.C. Penney lacks popular brands such as Ralph Lauren, Nautica, INC, Alfani, and Michael Kors, to name a few. Instead, J.C. Penney provides lower-end, less-popular brands, which could be why Macy's has higher sales and gross margin. Thanks to its wide assortment of popular brands, Macy's is able to attract more customers seeking the latest styles who are also willing to pay slightly more, as they believe the quality to also be better.

The second, and possibly even more important reason, is that Macy's is simply better at managing promotions than its peers. Macy's structures sales and coupons for certain products in such as way as to maximize customer traffic and purchases. Customers walk away feeling like they are getting what they want for less, and thus, shop more. Working in tandem with various promotional initiatives, Macy's products are well displayed throughout its stores with separate sections for each category.

Foolish takeaway
It is clear from these results that Macy's is exceptionally good at managing its gross margin. It is for this reason that Macy's has had consistent profits and shareholder returns while fellow competitors like J.C. Penney have struggled to make ends meet. Retail is extremely competitive, and for an organization to accomplish a consistently high gross margin is a sign of excellent management and a strong brand.

Foolish investors considering adding Macy's to their portfolio should do additional research on what else Macy's is doing to continue growing its gross margin and overall business before diving in. That being said, the company's gross margin gives it a great advantage over its retail competitors and is a sure sign that Macy's is worth a closer look.

 

Fool contributor Natalie O'Reilly has no position in any stocks mentioned. The Motley Fool owns shares of Dillard's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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