Monday, August 1, 2011

SuperValu's Gross Margin: The Lower The Better?

Rising gross margins are almost always cheered by market action. But a myopic focus on this figure can get a company and its investors stuck in a short-term mentality. Yes, increasing gross margins can signify pricing power or cost advantages. But higher prices and lower costs can also make short-term profits look good while actually hurting the business in the long run. (For example, a company could cut its service levels, raising gross margins now, but resulting in customer losses in future periods.) Consider SuperValu (SVU), which is using this phenomenon to its advantage.

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