JCPenney: Everyone's Talking Sales Growth, But Did You See the Margins?

Shares of J.C. Penney Company  (NYSE: JCP  ) shot up last week after the company's first-quarter report beat estimates. Further improvements could place the company back with competitors Macy's  (NYSE: M  ) and Nordstrom  (NYSE: JWN  ) . However, were the first-quarter results good enough to mend J.C. Penney's gross profit margin? 

Source: J.C. Penney

J.C. Penney's margins had stayed inline with those of Macy's and Nordstrom as recently as mid-2011. However, the hire and quick step-down of CEO Ron Johnson left J.C. Penney with a half-finished, unpopular renovation strategy.

So returned CEO Myron "Mike" Ullman had to slash prices on straggling inventory, reorder popular private brands discontinued under Johnson, and lure back a customer base alienated by Johnson's discontinued promotional policies. Investors weren't giving Ullman a lot of time to make these changes either. 

The first-quarter report mentioned a 230 basis point improvement in gross margin. Where does that put J.C. Penney in relation to its competitors?

Margin improvement 
I've discussed at length why a higher gross profit margin is better as it ensures that there's enough money left from the revenue -- after subtracting cost of goods sold, or COGS -- to trickle down  net income. So how did the first quarter's results change the margin story for the three department stores? 

Here's a look at their margins over the past two years -- or the period when J.C. Penney hit its roughest patch and began its recovery. 

Source: Company filings 

J.C. Penney's first-quarter improvements have the company's gross profit margin slanting back up -- and about to smack into Nordstrom's descending line. 

What caused this change? 

Revenue and COGS shifts 
The full gross profit margin equation involves subtracting COGS from revenue, dividing that answer by the revenue, and multiplying that result by 100 to form a percentage. So the two key components are COGS and revenue. 

Here's how those numbers changed for each store in the first quarter: 

 

Q1 Revenue

QoQ Change

Q1 COGS

QoQ Change

Q1 COGS % to Rev

QoQ Change

J.C. Penney

$2.8 B

(26%)

$1.9 B

(30%)

67%

(7%)

Macy's

$6.3 B

(32%)

$3.8 B

(31%)

61%

3%

Nordstrom

$2.8 B

(21%)

$1.8 B

(20%)

64%

2%

Source: Company filings. Quarter-on-quarter numbers used to explain the shape of the margin lines, rather than year-over-year growth.

The margin lines for Macy's and Nordstrom both dipped down in the first quarter. However, Nordstrom's suffered more even though its quarter-on-quarter losses were lower than those of Macy's. That's because Macy's COGS as a percentage of revenue was lower than that of Nordstrom. This meant that Macy's costs took less of a bite out of its revenue and that helped cushion margins. 

J.C. Penney has seen a smaller drop in revenue than Macy's but a larger drop than Nordstrom since the fourth quarter. However, J.C. Penney's COGS dropped by 10 percentage points more than Nordstrom's did. Penney's had the highest COGS as a percentage of revenue but also was the only company to have a drop in that metric between quarters. 

So J.C. Penney now has better control over its COGS and that's a good sign. But COGS isn't the only cost cut to watch. Operating expenses including SG&A also have the ability to eat away at the bottom line-and that's a topic worthy of its own indepth focus. J.C. Penney did drop operating expenses 3% between quarters but future improvements in both COGS and operating expenses depend on J.C. Penney continuing to regain sales volume. 

Foolish final thoughts
J.C. Penney's gross profit margin improved mostly because the company excelled at managing costs. Nordstrom suffered from a quarter-on-quarter revenue drop comparable to that of J.C. Penney and reported a lower drop in COGS. Macy's sheer size has cushioned it for now, but Nordstrom's margins could well drop to the bottom of the group if J.C. Penney reports another solid quarter. 

Want to shop for your next multi-bagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

 


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2967330, ~/Articles/ArticleHandler.aspx, 12/22/2014 12:53:07 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement