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Retailers Look to Counter Margin Woes: Will Efforts Pay Off?

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With growing technology, digital shopping has expanded by leaps and bounds, taking a major share from traditional brick-and-mortar stores. This has led to the rise of Amazon.com Inc. (AMZN - Free Report) , which caters to a larger share of the retail selling today, making traditional retailers cautious.

Changing customer preferences still remain the key reason behind the transforming Retail/Wholesale sector. In fact, customers prefer shopping from their homes, easy returns policy, options for trials at stores, speedy delivery and many more. Consequently, increasing troubles for retailers, who are trying to strike a balance between online and offline stores, and provide customer with a seamless experience. In view of these headwinds, the Retail sector currently has a Rank #14, placing it at the bottom 13% of the 16 Zacks sectors.

In a bid to woo customers and boost profitability, retailers are trying every means from enhancing its website, to remodeling or closing underperforming stores, augmenting delivery and payment systems, building new alliances, and perking up investments.

However, the desired change is coming at the cost of declining margins, with higher investments to enhance presence and increased operating costs being the main culprits. Increased promotional activities, higher spending toward online portal and lower traffic at stores are some other issues denting retailers’ margins. Although retailers are resorting to strict cost-cutting measures like increasing operational efficacy at production, enhancing supply-chain networks, revising the cost structures among others to lift margins, a turnaround on this front may take time.

With that said, let’s look at few retailers that are grappling with margin issues, initiatives to boost margins and how are they placed.

Starting with Abercrombie & Fitch Co. (ANF - Free Report) , we note that this retailer of premium, high-quality apparel has been witnessing strained margins since last four quarters. The company’s gross margin contracted 90 basis points (bps), 80 bps, 160 bps and 130 bps in the fourth, third, second and first quarters of fiscal 2017, respectively. Soft traffic at stores, higher promotional expenses and greater investments to improve profitability has been primarily weighing on the company’s margins. However, management is taking initiatives to reduce costs by streamlining its operations, close underperforming stores, focusing more on Direct-to-Consumer (DTC) model and expanding Hollister stores for generating incremental sales. Though gross margin in fiscal 2018 is projected to be slightly above the fiscal 2017 level of 59.7%, it is likely to remain under pressure in the first quarter. Abercrombie carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Hibbett Sports, Inc. (HIBB - Free Report) is witnessing negative gross and operating margins for six straight quarters now. Gross margin declined 153 bps, 337 bps, 440 bps and 160 bps in the fourth, third, second, first quarters of fiscal 2018, respectively. It witnessed 180 bps decline in the fourth quarter and 70 bps in the third quarter of fiscal 2017. Meanwhile, the company recorded a respective operating margin decline of 180 bps, 480 bps, 330 bps, 350 bps and 330 bps in the fourth, third and first quarter of fiscal 2018, and the fourth and third quarter of fiscal 2017. Further, it incurred an operating loss of $5.2 million in second-quarter fiscal 2018.

Higher promotions and markdowns undertaken to improve inventory, increased e-commerce penetration, greater operating and marketing expenses have been taking a toll on Hibbett’s margins. However, management is making efforts to boost margins and profitability by expanding its loyalty program, driving e-commerce growth and ramping up inventory management initiatives. Though Hibbett expects gross margin to expand in fiscal 2019, higher SG&A expenses, compensation costs and investments are expected to dent operating margin. Hibbett too holds a Zacks Rank #3.

DICK’S Sporting Goods, Inc. (DKS - Free Report) is another contender in the list of retailers grappling with margin constraints for last few quarters now. Gross margin declined 130 bps, 307 bps, 82 bps and 17 bps in the fourth, third, second and first quarters of fiscal 2017, respectively. Further, operating margin contracted 205 bps, 207 bps, 10 bps and 53 bps in the same sequential order. Higher shipping and fulfillment expenses; SG&A costs deleverage; and increased promotional activities have been denting the company’s margins. Although management is taking cost-reduction efforts to curtail its expenses and boost supply-chain initiatives, margins might continue to remain under pressure in the near term. The company expects gross margin to reflect a marginal decline on improved product innovation cycle and a better balance of inventory in the supply chain. DICK’S Sporting carries a Zacks Rank #3.

Finally, Bed Bath & Beyond Inc. (BBBY - Free Report) has been severely hit by margin constraints in the retail sector for seven straight quarters now. The company’s gross margin contracted 210 bps, 180 bps, 100 bps and 90 bps in the fourth, third, second and first quarters of fiscal 2017, respectively. The company also witnessed a respective gross margin decline of 60 bps, 80 bps and 70 bps in the fourth, third and second quarters of fiscal 2016. Operating margin contracted 310 bps, 340 bps, 360 bps and 240 bps in the fourth, third, second and first quarters of fiscal 2017, respectively. Higher direct-to-customer shipping expenses, lower merchandise margin, rise in coupon expenses due to increased redemptions are weighing on its margins.

However, Bed Bath & Beyond remains on track with its transformation plan that focuses on improving operational efficiency and customer loyalty along with SKU optimization initiatives. In addition, its strategic portfolio management office (SPMO) to allocate resources toward more profitable areas for improving margins, optimizing inventory levels and enhancing supply chain looks encouraging. Though management expects gross margin to decline in fiscal 2018, operating margin is expected to contract but lesser than that in fiscal 2017. The company has a Zacks Rank #5 (Strong Sell).

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