|New Threads Only:|
|New Threads & Replies:|
Forum List » Guru News and Commentaries|
Guru News, Stock picks and commentaries
Why Nordstrom Has Lower Gross Profit Margins Than Macy's: A Lesson in Accounting
Posted by: Mark Lin (IP Logged)
Date: November 16, 2012 03:58PM
Gross profit margin, calculated as sales less cost of goods sold, is commonly used as a key measure of profitability. However, gross profit margin is only useful for comparison between companies, if they are booking the same items in cost of goods sold.
Nordstrom Inc. (JWN) is a fashion specialty retailer offering high-quality apparel, shoes, cosmetics and accessories for women, men and children. One of its competitors is Macy's (M). If we compare JWN's and M's gross profit margins for the past 10 years, it appears that M has outperformed JWN in terms of profitability for a decade. However, using operating margins as an alternative measure of profitability shows a completely different picture.
This is a classic example of how different accounting policies could lead to vastly different reported numbers. JWN records the costs of buying and occupancy as part of cost of goods sold and hence has a lower gross profit margin. On the other hand, M accounts for costs of buying and occupancy as part of selling, general and administrative expenses.
Accounting rules under GAAP and IFRS give companies discretion to include (or exclude) raw materials costs, direct costs such as labour, utilities, rent, and depreciation in costs of good sold. This can distort financial ratios and lead to false and misleading conclusions of a company's superiority over another. Investors are advised to read the financial statements in detail and recast reported numbers for the purpose of analysis.
Stocks Discussed: JWN, M,
Disclaimers: GuruFocus.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on GuruFocus.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The gurus may buy and sell securities before and after any particular article and report and information herein is published, with respect to the securities discussed in any article and report posted herein. In no event shall GuruFocus.com be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on GuruFocus.com, or relating to the use of, or inability to use, GuruFocus.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. The gurus listed in this website are not affiliated with GuruFocus.com, LLC. Stock quotes provided by InterActive Data. Fundamental company data provided by Morningstar, updated daily.